Australia transaction volumes at decade lows over the past year

Volumes in the office sector were just 37% of the 5-year average in Q1.

Over the last quarter, both real asset performance and transaction markets in Australia have continued to be challenging. According to a Dexus Research report, high interest rates and market uncertainty have resulted in pressure on asset values. 

“Unlisted property funds returned -1.6% in the quarter and -8.2% over the year. Industrial funds outperformed within the real estate sectors at -1.8% in the year, followed by retail funds at -2.7%. Office fund returns were the weakest at -12.7%, due to significant declines in valuations of office buildings during the year,” the report said.

Here’s more from Dexus Research:

AREITs performed strongly with a 36.6% return in the year to Q1 2024. Listed real estate pricing benefited from an improvement in both broader equity markets and a tightening of bond yields. The strengthening of the AREIT index is an encouraging sign for real assets more broadly as it reflects investor confidence and tends to be leading indicator for unlisted real estate values. 

Transaction volumes have been at decade-low levels over the past year as investors adjust to the impact of higher costs of capital. The office sector was particularly affected with transaction volumes in the year to March 2024 just 37.4% of the 5-year average. 

Office sentiment has been affected by high levels of vacancy and caution about structural impacts of flexible working. The sale of a stake in the landmark asset 225 George Street, Sydney provides an insight into prevailing market values. 

Anecdotal reports put the capitalisation rate at circa 6.5%, comprising a 19% discount to book value. While soft, the sale should provide more information to valuers and investors in what has otherwise been a stagnant transaction market. Investment demand is anticipated to pick up through FY25, assuming that interest rates are seen to peak and that investors gain a clearer understanding of the cost of capital and market pricing.