Hotels have delivered the best total returns for commercial property investors over the past 12 months to September despite a marked decline over this period due to falling CBD room rates, according to the latest Australian Commercial Property Index compiled by the Property Council of Australia and IPD (Investment Property Databank).
The index tracks the performance of over 1,600 commercial property assets held by unlisted property trusts, REITs and government-owned commercial buildings.
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Annual total returns for the hotel sector fell by 620 basis points over the year to September, but the sector still continues to outperform offices, retail and industrial assets with an annual total return of 11.4%.
“The softening was driven by a decline in average room rates across major CBD hotel markets,” says IPD.
The office sector was the most stable sector over the year to September 2012, showing a slight decline of 30 basis points over the year to record a total return of 10.1%, “predominantly caused by weak demand linked to a soft labour market”.
Retail property was the poorest performer of the property sectors, posting a significant decline of 140 basis points over the year to post an annual total return of 8.8%.
“Weakness in returns was driven by ongoing softness in retail spending and general consumption,” says IPD.
Industrial sector returns declined moderately by 50 basis points to post an annual total return of 9.8%.
“Industrial property continues to be supported by a strong income yield, which insulates the sector from capital declines,” says IPD.
Across all sectors, IPD’s commercial property index generated a total return of 9.7% for the year ending September 2012, with 7.5% of this coming from an income return (predominantly rental income) and 2% from capital growth.
This was slightly lower than the previous quarter’s total annual return of 10% and down on the 10.6% total return achieved for the year to September 2011.
Commenting on the latest quarterly results, Peter McGuinness, research manager of IPD in Australia and New Zealand, says below-trend macroeconomic activity has resulted in softer capital growth and lower total return for the broader Australian property market.
“Looking forwards, the market is exposed to downside risk with continued slowing in China and a moderation in the mining boom, which is likely to result in modest growth over the short to medium term.
“The core CBD office markets of Sydney and Melbourne have been negatively impacted by sluggish employment growth and weak net take-up of space, translating into weaker capital growth and lower total returns.
“The non-core CBD office markets of Perth and Brisbane are the current outperformers, but with a slowing in the resource sector, both markets are heavily exposed to downside risk.
“In the retail sector, super and major regional shopping centres experienced the largest decline in returns as they were negatively impacted by weakness in discretionary spending.
“Conversely, neighbourhood shopping centres, which are anchored by supermarkets, have been supported by stable food retailing. With their high income yield, neighbourhood centres are expected to outperform larger format centres over the next twelve months.”
“The industrial sector continues to offer an attractive yield play for investors seeking a strong income stream. With capital growth across the broader market expedited to remain soft, a competitive income yield makes industrial property an attractive investment option,” says McGuinness