Transaction similarities in opposite ends of the property cycle

September 16, 2013 / By  

A part of my role as the Sydney CBD market research analyst involves monitoring transactions across Australian office markets on a quarterly basis. Currently, transaction volumes are at record highs across Australian CBD office markets. In 2012, AUD 7.3 billion worth of product traded, with a further AUD 6.1 billion trading through the year to August 2013.

These figures, however, tell only part of the story. If you peel back the headlines of AUD 100 million transactions, you will see a different story. The following graph shows the number of transactions for assets ranging between AUD 15 and 50 million between 1988 and 2013. Despite the weight of capital looking for passive assets in excess of AUD 100 million, the smaller end of the market is showing similar levels of liquidity to 2008 – a year which represents the deepening of the financial crisis. The similarity is apparent through the number of transactions, as well as the total transaction volumes in dollar terms in these years. 2008 recorded 20 transactions totalling AUD 637.6 million and 2012 consisted of 21 transactions totalling AUD 602.3 million. With the close resemblance between these two years, it raises the question: what were the similarities in the market between 2008 and 2012. The obvious answer is simple, there were no similarities.

The discrepancy between the two periods is that in 2008 we were in a Global Financial Crisis (GFC), buyers were scarce, while vendors were holding on to 2007 book values. High occupancy rates ensured that there was little distressed selling – financial institutions merely changed the terms of the loan when refinancing was required. Total office sales in 2008 accumulated to AUD 2.2 billion which is very low by historical standards. This is a clear indicator of the risk averse period the Australian property cycle was experiencing. In contrast in 2012 capital market conditions were very different, and Australia moved into the recovery phase of the property cycle. Buyers were no longer scarce but vendors were holding tightly to their assets. Office transactions through this period totalled AUD 7.3 billion. This reveals a significantly higher volume of sales in 2012 compared to 2008. And yet, almost the same number of deals transacted in the sub AUD 50 million price bracket.

The sub AUD 50 million cohort of the market is dominated by Private Investors. We are starting to see a re-emergence of traditional private investors and a number of new offshore entrants into the Australian market. Over the year to August 2013 we recorded AUD 6.1 billion deals in the sub AUD 50 million price bracket, equating to AUD 447.2 million from 17 deals. Taking the annualised figure this implies around AUD 670 million from 25 transactions. We believe the increasing level of investor interest, falling cost of capital and an attractive yield spread will see transaction numbers push back above 25 for this market segment in 2013.

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