Transaction volumes slow in commercial property with Hotels the bright spot – Benjamin Martin-Henry
Tighter credit markets have seen commercial property deals slow in Australia for the first quarter of 2023, according to Benjamin Martin-Henry, Head of Pacific Real Assets Research at MSCI, who was presenting at the Property Funds Association of Australia (PFA) 2023 Conference in Canberra.
Mr Martin-Henry said transaction volumes for the 2023 March quarter had fallen to 11 year lows, in contrast with the 2022 March quarter, which was the strongest first quarter for sales on record.
“The unknowns around credit markets and economic fundamentals may be causing investors to become more subdued. But there has also been a recent context of roller coaster fluctuations since Covid, which we have seen with record highs last year and a slowdown this year.
“While its common to see transaction volumes drop during periods of rising interest rates, the slow activity introduces other uncertainties. With fewer deals the process of price discovery becomes challenging for both buyers and sellers, which can cause more restraint in markets.”
Industrial, retail and office sectors all showed declining sales activity in the quarter. “Current challenges facing the market are common, in contrast with what we saw in the early days of the pandemic. Markets take time to adjust to rising rates, and may be looking for a clear direction.”
Hotels were the bright spot, according to Mr Martin-Henry. “The hotel sector saw an increase in activity as the reopening of borders continues to drive investors sentiment.
“There was a record-breaking deal in Sydney for the Waldorf-Astoria, which at $520 million was also the biggest single asset sale for the quarter. There are also several hotel transactions awaiting settlement.”
Capital flows from overseas into Australia also appear to have slowed, but Mr Martin-Henry said it was too early to judge. “Slow starts for overseas buyers are common as the first quarter of the year tends to be the quietest for overseas investment into Australian commercial property.
“Overseas investment has come off a little in the last couple of years. In 2021 and 2022, overseas investment accounted for 25% of transactions, but in the five years prior overseas investment comprised 31% of transactions.
“It’s too early to tell whether this is a trend or simply a case of markets reverting to their long-term averages following an elevated period of investment between 2018 and 2020.”
Martin-Henry said it will take time to establish international capital flows for this year. “Offshore buyers tend to target larger assets, which in turn take longer to settle. Over the last five years the average deal for overseas investors has been approximately $115 million, compared to approximately $7 million for domestic buyers.
“It wouldn’t be surprising to see more activity later in the year.”