COMMERCIAL PROPERTY RETURNS : WHAT WILL 2023 BRING ?
The commercial property market has been through significant changes over the past few years . The onset of COVID-19 caused a sizeable drop in investment activity and increased vacancies , putting pressure on income levels . However , after the continued drop in interest rates we saw a push by a growing range of buyers looking to invest . This uptick in transactional activity and availability of finance saw unprecedented falls in investment yields , growing capital returns across most asset classes . Income returns remained stable or up due to inflationary pressures however as we move into a rising interest rate environment these results have quickly changed .
Office
The Australian office market has had its share of ups and downs over the past few years . Many major CBDs are struggling to attract staff back to the office post COVID-19 , causing occupiers to reconsider their accommodation needs . With work from home still popular , high vacancies in some markets has kept effective rents down as incentives rise , however face rents remain elevated due to inflationary pressures . Demand to purchase office assets was high during the low interest rate period particularly from offshore groups looking to secure trophy CBD assets , however metropolitan markets with their stable occupancy was also an attractive investment choice , resulting in significant yield compression .
Despite rising interest rates during much of 2022 , the impacts were felt during late 2022 and are expected to continue into 2023 . With average yields moving upwards we ’ ve seen capital returns for office diminish , recorded at just 0.2 per cent in December 2022 after enjoying a five year average increase of 3.6 per cent per annum . The expectation is that this trend will continue , moving into negative territory in 2023 as the cost of finance increases . Income return levels have been more consistent , recording a 4.5 per cent annual return in December 2022 .
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