Rob Ellis

Rob Ellis

Cap Rates Continue to Rise, Transactions Remain Weak

The number of shopping centre transactions continues to fall away, while cap rates have risen sharply. Last year recorded a surge in shopping centre transactions and some slowdown was inevitable. However, shopping centre activity has now slowed to a crawl, with The Data App estimating, in the three months to September activity, however measured is down over 50% on a year earlier. Meanwhile, cap rates continue to rise.

Cities Aren’t Working

The rise of hybrid working and the increased uptake of on-line shopping, in the response to the COVID 19 pandemic, has had a profound impact on both office and retail property markets in Australia’s major capital cities.

Improved working flexibility, technology and less commuting have underpinned an uptake in working from home by Australian employees. The structural shift in the role of the city office and the 9-5 working model has created challenges for all capital cities across the globe. This shift has taken place despite numerous incentives and, in Australia at least, the return to the office appears to have stalled. While estimates vary, the evidence suggests, the percentage of office workers physically in the office will be well down on pre COVID 19 pandemic levels.

Cap Rates Trending Up, Transactions Continue to Moderate

Shopping centre transactions continue to moderate. This follows the 2021 boom, and the move to safer smaller retail assets, backed by the big supermarket chains and large format centres, underpinned by the likes of Bunnings. As well as this, last year witnessed a number of non-core sub-regional shopping centres being offloaded. The Data App estimate, in the three months August, the number, volume and value of shopping centres continued to be significantly down on a year earlier. Even though transactions remain dominated by smaller shopping centres outlets, cap rates, after dipping below 5% in June, continue to move higher.

Cap Rates Start To Edge Up

The number of shopping centre transactions slowed dramatically in July, while cap rates posted a reversal of their downwards trend. The Data App estimate transactions, whether measured by number, volume or value, in the three months to July, were again well down on this time last year. Furthermore, cap rates, after hitting a sub 5% cyclical low last month, rebounded to 5.3%.

Retail Cap Rates to Rise – But Not Uniformly

Rising interest rates and inflation, tied in with a high dose of economic uncertainty, could see Australian retail property values experience meaningful falls from current levels, as investors adjusts to new post-pandemic economic conditions.

Over the course of the last two years or so, shopping centre transactions have boomed, aided by a surge in excess liquidity, both in Australia and elsewhere, boosting both real and financial asset values. This was also assisted by policy makers hammering interest rates to the floor.

A New Low For Commercial Retail Cap Rates

Even though the number of shopping centre transactions nudged up again in June, the trend continues to moderate. According to The Data App estimates, in the three months to June, the number, volume and value of shopping centre transactions are all well down on a year ago. Cap rates also hit another new cyclical low, going under 5% for the first time.

A Tale of Two Cities: Sydney and Perth Post Pandemic

Although Sydney and Perth are separated by over 3,000 kilometres and have undertaken vastly different pandemic policy setting, there are behavioural changes which have become common to both cities. An analysis of commuting patterns, as well as commercial and residential property markers, illustrates the flow-on effects of increased working from home; a practice which has become more prevalent following the pandemic.

Perth – After The Pandemic

As Australia emerges from the COVID 19 pandemic, there is growing evidence of the behavioural changes which have been made in the way people live, work and shop; all of which is likely to have long term implications for our major cities.

Even though last remnants of the restrictions have extensively been lifted, some significant difference in Post COVID Perth remain. The City has changed.

An analysis of commuting patterns, as well as commercial and residential property markers, illustrates the flow-on effects of increased working from home; a practice which has become more prevalent following the pandemic.

How Much Compensation for Investment Risk?

Whilst the number of shopping centre transactions edged higher in May, the trend remains a slowing trajectory. Also, in the three months to May, at a shade over 5%, cap rates hit a new cyclical low. The Data App estimate, in the three months to May, compared to a year earlier, the number, volume (sqm) and value of shopping centre transactions all moderated. It is increasingly apparent, after the surge in transactions last year, totalling $13.6bn in value, transactional activity is returning closer to historical levels.

Sydney – Post Pandemic

Now that Australia has emerged from the COVID 19 pandemic, there is growing evidence of the behavioural changes Sydneysiders have made in the way they live, work and shop; all of which is likely to have long term impacts on the city.

The PAR Group’s latest study examined changes to commuting patterns and commercial property occupancy and yields, e-commerce spending, and residential transactions from pre-pandemic levels, to identify the impact, so far, of the COVID 19 pandemic on the way Sydney residents live, work and shop.