Amid the developing COVID-19 situation, Australian commercial real estate investment has fallen sharply in the first quarter of 2020, dropping to $3 billion, which is down 81% quarter-on-quarter from $15.9 billion in Q4 2019, of the second strongest quarter on record.
Whereas the first quarter is typically soft for investment volumes, Q1 2020 has recorded the lowest quarterly volume
since 2012, which is down 52% compared to Q1 2019.
According to Cushman & Wakefield research, the dramatic slowdown in transaction volumes is attributable to both the absence of large portfolio transactions, travel restrictions, and softer confidence related to the COVID-19 situation. During the quarter, escalating international travel restrictions weighed on foreign investment, representing 22% of all investment compared to an average of 42% over 2019.
National investment activity was led by the office market with $1.6 billion in deals transacted representing 54% of the total, down 78% quarter-on quarter from $7.3 billion. The industrial sector appears to be the least affected of the commercial property sectors recording $524 million, buoyed by an uplift in e-commerce. Conversely, retail continues to come under pressure with $730 million recorded, with escalating restrictions of trade designed to curtail the spread of COVID-19 impacting shopping centre sales.
James Patterson, Chief Executive, Cushman & Wakefield, said: “The COVID-19 situation continues to evolve at a rapid pace, and the impact is being felt in all areas of the economy.”
“For the commercial real estate sector, it is undeniable that uncertainty around the length and extent of the pandemic is leading to restricted or delayed investment decision-making which has weighed significantly on investment volumes.
However, at this stage we aren’t seeing assets brought to market as a result of vendor distress which is encouraging.”
“While the outlook remains uncertain, the Australian commercial property sector was in excellent shape going into this black swan event, and those strong foundations have the potential to underpin a strong eventual recovery for the sector. In the meantime, our people and the broader industry are doing a tremendous job of adjusting to the realities of a new operating environment.”
John Sears, Head of Research Australia and New Zealand, Cushman & Wakefield, said: “With much of the market relatively quiet until after Australia Day, and COVID-19 bringing extreme disruption in the latter part of the quarter, we saw the lowest recorded investment volume since 2012.”
“However, the market continues to operate at different speeds. While the retail sector is clearly doing it tough, it appears that industrial property may be benefitting from an uplift in e-commerce activity as retailers shift their operations even further online.”
Looking forward, while COVID-19 is expected to continue to constrain investment activity, a number of significant transactions are expected to complete. This includes the $950 million sale of 39 Martin Place to ISPT, the $366 million settlement on 1 April of GIC’s additional 24% interest in the Dexus Australian Logistics Trust and Poly’s $290 million investment in 59 Goulbourn Street.
“Once the crisis is over, it is expected that investor appetite for Australian commercial real estate assets will rebound strongly, supported by our relatively strong economy and solid market fundamentals. We expect investors to return to the market, attracted to the potential for higher yields from commercial real estate given lower fixed interest investment yields, such as the Australian government 10-year bond trading near record low yields,” John Sears added.
Focus on New South Wales (NSW)
During Q1 2020, investment in commercial real estate assets located in NSW declined by 82% to $1.1 billion, down
from $6.3 billion in Q4 and 58% lower than Q1 2019. NSW office asset sales were also down 86.5% quarter-on-quarter to $579 million.
This included eight transactions, the largest being 100 Walker St North Sydney, sold for $160 million to Pro-Invest. Other transactions included 475 Victoria Avenue Chatswood for $120 million and 75 Crown St for $102 million.
Investment in NSW retail property fell to $213 million in Q1 2020, down 75.2% from Q4 2019 and 33% lower than Q1 2019. This continued the trend of slower growth seen during 2019 with the largest trade in Q1 2020 being St Mary’s Village which was sold for $68 million.
While investment in NSW industrial assets did not fall to the same extent as other asset types, limited stock availability continued to hamper sales volumes. Industrial investment fell to $261 million in Q1 2020, down 57.1% from Q4 and 33.3% lower than Q1 2019.
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