The Colliers Capital Markets 2021 outlook shows that the forward projection for Australian commercial investment remains positive, despite current economic slowdown.
Australian transaction volumes are down 58% compared to the previous year, with $10.96 billion trading over the first three quarters of 2020. The office and retail sectors have felt the largest impact, down 75% and 29% respectively from 2019 levels at the same point.
All states have recorded a fall in transaction volumes; QLD (-67 per cent), NSW (-66 per cent), WA (-38 per cent), VIC (-29 per cent) and SA (-7 per cent). Capital inflow from offshore investors is buoyant, representing 32% of deal volumes so far in 2020.
John Marasco, Managing Director, Capital Markets at Colliers said, “So far in the first half of 2020, the assets that have traded have shown minimal movement on yield metrics, reflecting significant pent-up capital seeking placement and the lack of stock available for sale, which bodes well for the sector”.
“We are seeing the flight to quality thematic is beginning to play out as investors chase strong covenanted assets with long WALEs.”
“Most of the major domestic institutional investors are well capitalised with several undertaking capital raisings to shore up their balance sheets; as gearing is much lower than during the GFC, these investors have the ability to ride through the initial pandemic period.”
The Colliers Capital Market Outlook has found that office fundamentals remain strong, despite the events of 2020 changing how, where and when we work. After a record year in 2019, with $25.0 billion of sales in both metro and CBD office markets, total sales volumes are 75% down from the same period in 2019, with sales to Q3 2020 at $4.3 billon, with CBD markets accounting for $458 million.
Adam Woodward, Head of Office Capital Markets said, “Despite the limited transactions year to date, the outlook for the office markets remains a positive one.”
“Nationally, Colliers has been appointed to sell over $2bn of office assets, highlighting the confidence returning to the sector.”
“There has been much discussion about the underlying fundamentals of the office market shifting; however, while there is likely to be much more flexibility in the workplace, recent survey results have shown over 85% of office workers do not want to permanently give up their desk. This will be key to underpin long term occupancy in the office markets.”
“Moving forward, we expect that the office asset class will continue to attract strong demand, with the fundamentals of the Australian market providing extremely attractive opportunities to offshore groups within the region; we expect that this flow of capital is likely to continue through into 2021.”
The Capital Markets Outlook found that the retail sector has seen one of the largest impacts during the COVID-19 pandemic, however there are signs that a recovery in household consumption is on the horizon.
Spending patterns have been significantly disrupted with some categories such as travel, which last year accounted for $110 billion of expenditure, being redirected to retail and household savings in 2020.
Coupled with Federal Government stimulus and early superannuation withdrawals, Australian households have contributed over $70 billion into the economy between March and September, giving the capacity for household consumption to improve substantially in the coming quarters, which bodes well for the retail sector into 2021.
Lachlan MacGillivray, Head of Retail Investment Services at Colliers said, “We are starting to see signs of an improvement in the market, with enquiry increasing and deals transpiring. A key factor is the significant pricing disconnect between retail and other asset classes complimented by the opportunity to buy generational and defensive “Trophy Assets”.
“High conviction Investors that are well capitalised and are prepared to look through the short-term challenges will be ideally positioned to take advantage of these opportunities.”
Industrial and logistics property has been brought to the forefront in 2020 and investment allocations to industrial have risen significantly as result of several structural tailwinds.
The industrial and logistics investment market is expected to gather further momentum in 2021 due to significant levels of infrastructure investment and the exponential growth of e-commerce. More broadly, economic conditions are expected to improve in Q4 2020 and into 2021 which will further support spending patterns and industrial occupancy demand.
“At present, there is an estimated $26 billion in capital looking to invest in the sector,” said Gavin Bishop, Head of Industrial Capital Markets at Colliers.
“Given that just $3.57 billion has traded so far in 2020, it highlights the significant mismatch between supply and demand and the significant volume of unsatisfied capital looking to be placed.”
“As a result of this, we expect that additional assets will be brought to market in 2021 as groups look to capitalise on the continued strength of the industrial and logistics market.”
2020 has brought an abrupt halt to the bull run of transactions for the Australian hotel investment market, with transactions declining markedly to total $406 million over the first nine months of the year, relative to the long-term average of $1.6 billion.
This would represent the lowest annual transaction volume since 1999 and highlights the severity of the COVID-19 crisis for the Australian hotel investment market.
Gus Moors, Head of Hotels at Colliers said, “The global hotel and tourism sectors have been one of the most impacted by social distancing measures introduced by governments across the world in response to COVID-19 with impacts widespread and indiscriminate across borders, cities and visitor segments.”
The outlook for hotel trading across Australia continues to improve, though demand is expected to come back in layers over the coming year.
Australia’s domestic leisure markets are expected to recover first as interstate border restrictions are lifted with notable trading spikes during school holiday periods boosting regional hotel markets.”
“The establishment of a travel bubble between New Zealand and NSW/NT effective from October 2020, is also hoped to provide a blueprint for the wider reopening of Australia’s international borders, providing an additional boost to hotels.”
Access the report here.