Commercial property deal activity tumbled in Australia during the fourth quarter of 2022, as uncertainty over debt costs and pricing weighed on investors.
MSCI Real Assets found transaction volumes dropped 66% to $10.2 billion compared to a year earlier in Q4 2022.
The fourth quarter represented less than one-fifth of total 2022 deal activity, compared to a typical share of about one-third.
The sharp downturn into the end of the year reflected the mounting economic pressures and cost of debt through 2022.
Investment volume sector summary
For the year as a whole, transaction activity slipped 25% versus 2021 to $63.3 billion. Still, the 2022 total was nearly on par with 2019, which was the second-strongest year on record behind 2021.
Benjamin Martin-Henry, Head of Pacific Real Assets Research at MSCI, said activity was widely expected to moderate in 2022 after a blistering pace in 2021.
“The magnitude of the slowdown is due to wider economic pressures including the slew of interest rate increases to combat inflation,” Martin-Henry said.
“Increasing debt costs mean the pricing outlook is unsettled.”
Quarterly investment volume by deal type
All the core sectors posted declines greater than 50% in the fourth quarter, with retail showing the largest drop.
While it was the most active sector for investment in 2020 and 2021, industrial deal volume retreated in 2022, dropping by 35% to $20.9 billion.
Large portfolio deals were behind the industrial sector’s recent record years, but in 2022 only 20 such deals totalling $3.3 billion settled, compared to the 37 in 2021 that totalled $10.5 billion.
The office sector registered a shallower decline in activity for the year, down just 10% to $23.4 billion.
The hotel sector saw a resurgence in investor appetite in 2022 as firms such as Baring PE Asia spent a total of $3.4 billion.
Metropolitan markets accounted for 75% of total volume.
The pub sector had another good year, with investors buying nearly $3 billion of assets, close to 2021’s record annual level of $3.5 billion.
Annual investment volume by deal type
Yields have expanded in the office and retail sectors for a third consecutive quarter, while industrial sector yields expanded for a second straight quarter.
Yields in the office sector were some of the first to adjust to increases in the cost of debt, most notably in Sydney and Perth, and office specialist funds in the MSCI/Mercer Australia Core Wholesale Monthly Property Fund Index recorded negative capital growth in the fourth quarter.
“The decline in transactional activity makes the task of valuing assets accurately even more difficult, but with the costs of debt having increased across all property types it’s fair to expect a continued pricing adjustment during 2023,” said David Green-Morgan, Global Head of Real Assets Research at MSCI.
