Property deals fall by one-third after record run

At least some of that relative decline is explained by an incredible burst of deal-making in the logistics sector last year as the market emerged from the initial COVID-19 lockdowns and was galvanised by the surge in demand for e-commerce space. That appetite drove a series of headline exchanges including the $3.8 billion sale of the Milestone portfolio, and the $850 million Fife sale.

“After such a strong 2021, volumes were likely to normalise in 2022, but the recent economic issues have further impeded activity, particularly at the smaller end of the deal spectrum,” said Benjamin Martin-Henry, head of Pacific real assets research at MSCI.

“Smaller investors are more sensitive to increases in the cost of capital so the recent interest rate rises may have curbed deal flow.”

Over the second quarter, the trade in office buildings increased by 7 per cent to $5.4 billion, while in the retail sector deal volume declined by 28 per cent to $3 billion, according to the MSCI Real Assets tally. The analysis, completed in late July, takes in office, retail, industrial, hotel, apartment and senior housing properties and portfolios, valued at $1 million or more.

Portfolio deals, which have helped drive the market in recent years, fell over in the first half of 2022 to 17, down from 25 a year earlier. The drop-off was even more stark in the industrial sector, down from 17 to just four.

The largest single industrial asset to change hands in the second quarter was a site on Mitchell Road in Sydney’s Erskineville, bought by Coronation Property for $315 million, which is planning a major residential redevelopment.

Casuarina Square in Darwin was the largest retail deal for the year so far – sold by GPT Group to Sentinel for close to $400 million – while the Alexandria Homemaker Centre in Sydney was bought by Goodman for $202 million on a yield around 4 per cent.

“Pockets of the retail sector have seen some robust demand, but deal activity across the sector has dropped 28 per cent in the first half of the year. Overseas investors have leaned much more to the office and industrial markets,” said David Green-Morgan, MSCI’s head of real assets research.

Deal-making in non-core sectors, however, has picked up including for hotels. Private equity player KKR settled a $315 million acquisition of the Sofitel Wentworth in Sydney, while Singapore sovereign wealth fund GIC partnered with Salter Brothers to acquire the Travelodge Hotel portfolio for $618 million, which closed in the 2022 second half.

GIC also purchased a 49 per cent stake in the Wee Hur student housing portfolio, comprising seven properties across the country, for $568 million.

Not counted in the second quarter tally is the country’s single biggest hotel deal yet, with Baring Private Equity Asia securing the Hilton Sydney for around $530 million. The acquisition was completed last week.

Yet despite such headline deals, second quarter transactions were around 5 per cent below the long-term average. While that relative slowdown may simply be the result of the market returning to normal after last year’s frenzy, it may also point to the start of a downturn.

“There are increasing signs of the latter,” the MSCI Real Assets report notes.

Last month, ASX-listed fund Charter Hall announced it had acquired a half stake in the $2.1 billion Southern Cross Towers complex in Melbourne, after the deal had initially shaped up as an acquisition of both towers entirely.

Rising interest rates increases costs for investors – an impact which listed property trusts are highlighting this earnings season – and reduces their borrowing ability. As a result, there may be fewer buyers in the market and prices will get squeezed.