Yield spreads to improve after falling to GFC lows: RWC

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Yield spreads to improve after falling to GFC lows: RWC

The challenges facing WA’s retail, office and industrial markets has been highlighted by new research showing the yield spread is at its lowest point since the GFC *******.

Research by Ray White Commercial shows the yield spread — which is the gap between the rental yield and the cash rate — now sits between 100 and 200 basis points, which is the lowest point since 2009.

The industrial sector is most affected by changes to investment conditions, with spreads to finance rates narrowing to as low as 100 basis points, down from a high of 600 basis points in 2020 and 2021.

Ray White’s head of research Vanessa Rader said office and retail yields spreads sit about 180 to 200 at present, down from yield spreads in the 500s in the post-lockdown era.

“The spread between cash rates and yields remained attractive, reaching 500 to 600 basis points, resulting in record-breaking commercial property investment in Perth during 2021/22,” Ms Rader said.

“As interest rates began rising from mid-2022, Perth’s higher yields continued to draw interstate buyers, further compressing yields.

“Added to this was been a vibrant owner occupier market, often competing at above market values to secure accommodation and shelter from rental increase, particularly in an environment where new supply for some assets types have been limited given the difficulties in the construction sector.”

Ms Rader said WA’s current spread at about 100 to 200 was not sustainable, as historically it sat at 500 to 600 in WA, compared to the 400-500 basis points in the less risky east coast markets.

“We know historically the yield spread is much higher, so we need to see the cash rate improve — which is anticipated — to move the spread up,” she said.

“If you couple that with further yield increases, this will also improve the spread.”

As of June this year, WA’s prime yields stood at 5.5 per cent for industrial, 6.1 per cent for CBD office, and 6.5 per cent for retail properties.

These rates increased only marginally compared to east coast markets, resulting in limited capital value corrections.

Despite nationwide negative capital growth, Perth’s high demand helped it outperform in total returns.

WA’s industrial sector had a 3.1 per cent increase in total returns, surpassing NSW (2 per cent) and Victoria (-3.2 per cent)

Similarly, Perth CBD office market showed a 0.9 per cent total return, contrasting sharply with the Sydney (-10.2 per cent) and Melbourne (-11.3 per cent) CBDs.

The growing income returns have helped maintain these positive total returns, boosting confidence in WA commercial investment. But there were challenges and opportunities ahead.

“Looking ahead, expected interest rate improvements in late 2024 and 2025 may help restore spreads to more acceptable levels,” Ms Rader said.

“However, the market bottom ******** uncertain. High-quality assets with strong returns or development potential continue to exert downward pressure on yields.”

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