Yesterday’s interest rate cut - the third since May, which collectively have resulted in the RBA base rate halving to 0.75% - and the certainty of more to come give mounting weight to the notion that property yields will compress further.
The yield compression cycle for Australian office markets that started in 2013 essentially came to a head around mid-2018. Since then, the Australia average prime CBD office yield has compressed just 25bps to September 2019. But bond yields have fallen ~160bps over the same period, resulting in property yield and total return spreads over bonds much higher than historical norms. Reversion to long-term pricing relativities will result in another leg to the property yield compression cycle and by end-2020 yields will be 25-50bps lower in most office and industrial markets. The retail sector is unlikely to experience further compression due to the cyclical and structural challenges within the sector; however, further compression in the office and industrial sectors will make retail property more attractive to investors in terms of relative pricing between the sectors.