Australia real estate transaction volumes hit lowest level in over a decade

Investors have turned cautious as capital costs rise.

According to a report by Dexus Research, unlisted property returns in Australia saw further weakening over the past quarter. Total returns for all funds were down -3.9% in the year to Q3 2023, industrial was more resilient at +4.8%, retail relatively flat at -0.2%, and office weaker at -8.6%. 

“The weaker returns were largely the result of softening capital values with income returns relatively stable and positive at 4.5% on average,” the repor said.

Here’s more from Dexus Research:

Equity markets had a negative quarter with AREITs returning -2.9%. This is consistent with rising bond yields affecting the pricing of defensive assets. However, returns for AREITs over the full year were relatively healthy at 12.5%, off a low base. 

It is worth viewing the current cycle in the context of long-term trends. Over the past 20 years, real estate and infrastructure have provided fairly consistent returns in the 5% to 15% per annum range, interspersed by short periods of revaluation. In 2009 the downturn was caused by the global financial crisis, while this time it is rising interest rates after COVID. 

Such periods of revaluation often provide good opportunities to enter the market. For example, investors who purchased real estate in Q4 2009 saw a 67% increase in asset values over the next decade. Unlisted infrastructure returns have compared well with real estate over the past 20 years. 

Transaction volumes in Q3 2023 dipped to the lowest level in more than a decade, reflecting caution by investors at a time of rising cost of capital. Anecdotal evidence points to a wider than usual gap between buyers and sellers. Office volumes have seen a sharp decrease compared to the same period last year. 

Liquidity in transaction markets is expected to improve from Q2 2024 assuming interest rates are seen to peak and a fall in 10-year yields allows investors to better gauge their cost of capital. By this time a softening in capital values should give investors greater confidence in achieving their required returns