Equity market volatility to benefit property
Researchers from property group, JLL, believe stock market volatility may draw investors to the relative safety of real estate.
While the company noted the possibility that investors could seek shelter in the property market, it predicted that, "transaction volumes are expected to be lower in 2016 and opportunities will be concentrated in the $50 to $200 million lot size", with a rent recovery in certain markets adding to the allure.
"Volatility in equity markets provides a reminder of the defensive characteristics of real estate and the stability of income return.
"Yield compression is unlikely to be a major feature of most office markets in 2016. However, an expectation that bond yields will remain lower for longer makes real estate pricing attractive.
"The effective rent recovery in Sydney and Melbourne provides an additional ingredient to the investment thesis and some core investors will consider opportunities that provide some leasing market exposure to the 2017 to 2018 period."
The firm's research found the yield compression thematic was more pronounced for Australian office markets in 2015, and that in a low growth environment, investors were likely to lower their return expectations.
"The inflation-indexed bond rate reached a low of 0.46 per cent in late February 2015, before increasing to 1.11 per cent at the end of 2015," the research said.
"While bond yields moved slightly higher over 2015, a low treasury yield environment has persisted in Australia since 2010 and investor reassessment of yields for risk assets highlights the operation of an efficient market.
"Nevertheless, the spread between prime grade office yields and the real risk-free rate remains wider than historical benchmarks.
"The wider-than-average spread between yield and the risk-free rate suggests there is scope for further yield compression in Australia.
"The yield compression argument is supported by the improved outlook for effective rental growth in Sydney and Melbourne."
AUTHOR
Nicholas O'Donoghue
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