Hot Take - What would a trade war mean for real assets?
The United States has announced a series of tariffs and other countries like China, Canada and Mexico are responding.
Dexus Research's Real Asset Review for Q4 2024 describes the key trends in Australia's main real asset market including commercial real estate, healthcare and infrastructure, including a spotlight on office performance.
Key trends include:
1. Substantial lifts in commercial real estate and infrastructure deal flow
After a quiet year, deal flow in both commercial real estate and infrastructure markets is up significantly compared to this time last year as investors respond to an apparent peaking of the global interest rate cycle and have greater confidence that the headwinds facing real asset valuations are abating. In the past six months, commercial real estate transaction volumes were up 18% compared to the same period last year and the average size of transactions is up 60% this year so far, compared to 2023.
In the infrastructure space, the value of deals in the six months to Q3 2024 was around double the same period last year at US$5.6 billion. The average size of transactions also increased, indicating greater investor confidence.
Dexus anticipates an even more favourable market for infrastructure M&A opportunities once interest rates begin to fall with infrastructure investors likely to allocate back to core assets as the returns become more attractive.
2. Shopping centres are now outperforming other sectors
After years of underperforming, retail (shopping centre) portfolios are now outperforming other sectors as relatively high yields and improving rents and occupancy flow through to valuations.
In addition, shopping centres are benefiting from improving retail sales growth.
Another positive is that the supply of enclosed shopping centre space projected over the next two years is around 70% of the 20-year average.
3. Averages hiding office sector strengths
In a largely subdued office sector, the average numbers are hiding pockets of relative strength. We are seeing unprecedent divergence in fundamentals between different locations in the Sydney and Melbourne CBDs. For example, effective rent levels in core precincts are much higher than other precincts and the gap is widening.
In the Sydney core CBD, rents have increased by up to 13% in the past year, while office rents have contracted in the western corridor. These trends reflect a clear preference for centrally located, high quality working environments.
4. There is also a divergence in office vacancy rates
Office vacancy rates are below 10% in premium buildings in the core of the Sydney and Melbourne CBDs, but the situation is more nuanced than this figure indicates.
Research indicates that across all CBD markets, 44% of buildings have no vacancy and that 66% of the vacant space is contained in just 10% of the buildings.
