Potential $9 billion pool of A-REIT and superannuation money to help drive yield compression in the medium term

​Sydney, 25 March 2013 – The potential reallocation of superannuation funds to property, an ongoing improvement in relative returns and the current leverage capacity of the major REITs will support a compression in property yields in the medium term according to a new ViewPoint from CBRE.

The report compares current market conditions to a “balancing act”. While investor appetite is rising, CBRE’s Head of Research for Australia, Stephen McNabb, said occupier markets remained subdued, which would keep yields in check in the short term.

However, the ViewPoint highlights a range of factors which will swing the balance in the longer term.

“In general, yields are driven by confidence and growth expectations, both of which are are below historical averages, with only tentative signs of a recovery emerging,” Mr McNabb said.

“Subdued confidence is offsetting lower bond yields, falling credit risk premiums and borrowing rates which is holding property yields relatively stable at an aggregate level. However there are a range of medium term factors unfolding which will support yield compression – namely a potential reallocation of superannuation funds to ‘riskier’ assets, leverage capacity and an ongoing improvement in relative return.”

Another factor to consider is the continued foreign investor interest in Australia which is expected to help drive yield compression.

That said, the ViewPoint highlights a clear distinction between the outlook for premium grade yields and those for secondary assets.

“While a number of factors are supportive for yields in the longer term, the fact that confidence remains weak will support prime rather than secondary yields in the next six to 12 months,” Mr McNabb said.

Positive indicators for the market include the high cash allocations of the super funds – some $30 billion over 2011 and 2012 (almost double historic levels.) Mr McNabb said a combination of stable yields and falling deposit rates could be the catalyst for some of that money to flow into “risker” asset classes such as property.

Lower levels of leverage in the REIT sector could also provide potential for increased acquisition activity – and by extension support yield compression moving forward, according to CBRE National Director, Capital Markets, Josh Cullen.

“We have seen a reduction in A-REIT leveraging to around 26% from a peak of circa 40%,” Mr Cullen said.

“With borrowing costs lower and price to NTA’s rising, the ability to fund acquisitions has improved. We estimate funding capacity of $6 billion from the A-REITs if leverage moves back to a midpoint between today’s level and the prior peak (which would still be a conservative gearing ratio of 32%).”

Assuming 10% of the $30 billion in super fund cash allocations was also directed to domestic property, some $9 billion in A-REIT and superannuation money could find its way into the sector.

“With a strong focus on capital management and solid levels of inflows into the listed sector, A-REITs in particular are expected to be more aggressive buyers this year,” Mr Cullen said.

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