Major uncertainty over whether or not commercial property in Australia currently represents good relative value, compared to other major markets, has resulted in a notable downshift in investor activity.

What overseas investors and their local counterparts are unsure of is pricing, especially given that Australia hasn’t witnessed the same corrections as some overseas markets.

Lack of pricing clarity, a major roadblock to deal flow this year, has along with prevailing economic and geopolitical issues delivered sales of commercial property in Australia for July through September at the lowest level for a third quarter in more than a decade.

According to the latest Australia Capital Trends report from MSCI Real Assets, deal volume at $8.2bn in the third quarter was down 64% relative to a year earlier.

Year-to-date, volume was $27.8 billion, a decline of 55%.

Cross-border investors sidelined

With cross-border investors happy to sit on their hands in the third quarter, acquisitions totaled just $3.7 billion, down over half (58%) on the period recorded last year. So far this year, these investors have deployed only $6.7bn, compared with $17.3bn for the same period in 2022.

Singaporean investors were notably absent from the market this year, with the largest office deal of the year [for this investor group] involving a JV between GIC and Gurner TM demolishing an office property in Sydney (189 Kent Street) to build a residential asset.

“Overseas investors have historically targeted offices when deploying capital in Australia, so with the structural shift in the sector it’s of little surprise to see volumes so low for them,” said Benjamin Martin-Henry, Head of Pacific Real Assets Research at MSCI.

“The number one question I get asked from overseas investors is if Australia still represents good relative value compared to other major markets, given the lack of price adjustments. For many, it seems not.”

Three core sectors

While the three core sectors all showed significant double-digit declines in activity, office fared the worst.

However, the rate of decline in performance returns may be cooling, with the MSCI/Mercer Australia Core Wholesale Monthly Property Fund Index (in Q3 2023) recording a negative quarterly return of 1.6%, shallower than the 2.8% decline seen in the second quarter.

Office: Sales dropped by 77% in the third quarter relative to the previous year. While two long-awaited office deals were completed, major deals have been slim pickings for the year to date.

For example, only seven office sales priced at more than $200m eventuated in the first nine months, compared with 32 such deals recorded over the same period last year.

Top deals during the quarter included Dexus sales of 44 Market Street and 1 Margaret Street at $393m and $293m respectively.

David Green-Morgan, Global Head of Real Assets Research at MSCI notes while the MSCI Price Expectations Gap between buyers and sellers shows a small narrowing in the third quarter, there’s still a significant gulf on office pricing.

Industrial: While the industrial sector was by no means immune to challenging market conditions in the third quarter, Sydney and Melbourne [industrial markets] were ranked first and third respectively in year’s most active market segments.

A key kicker for the industrial sector in Q3 2023 came from UniSuper’s purchase of a 50% stake in Dexus’s Australian Industrial Partnership from NPS.

Comprising 20 assets in Western Sydney and Melbourne, at around $500m, this portfolio deal is the largest so far this year.

Retail: The knock-on effect of inflation and rising interest rates on consumer spending saw the sale of retail assets fall by slightly over a half (51%) in the third quarter relative to the previous year, which mirrored a corresponding fall in total activity for the year.

However, notable (retail) acquisitions during the quarter included Haben Property Fund’s acquisition of a 50% stake in Stockland Townsville from AMP Capital.