Australia's property prices are 'just frightening' says KordaMentha partner

Australian Financial Review Jun 16 2016 7:49 AM

Matthew Cranston

Warnings about Australia's commercial property market as well as the growing supply of new apartments have been made at rating agency S&P Global's property outlook, with KordaMentha real estate partner Paul Mirams saying prices were "frightening".

Australia's commercial property market – shopping centres, office towers and industrial sheds – has seen yields tighten to levels not seen since before the financial crisis.

A panel discussion including several S&P analysts, Stockland's general manager for Treasury John Arentz, KordaMentha real estate partner Paul Mirams and AMP Capital Investors senior credit analyst Tim Jarvis debated the global investor quandary of where to find better yield.

Mr Jarvis said Australia's capitalisation rates were not necessarily comparable to capitalisation rate calculations in other countries because of the vagaries brought about by the incentives used to attract tenants.

Some suggested that investors would look to alternative property assets but that drew a strong response from Mr Mirams.  

"You know you are at the top of the market when people are out buying student accommodation and caravan parks and petrol stations," he said.

"It is a new world, yes. But the prices are just frightening."

Prices for office towers have shot up as part of the hunt for yield with groups such as QIC Global Real Estate doubling its money in less than three years by selling a Brisbane office tower for $159 million to a Singaporean group.

The Reserve Bank of Australia said in April that domestic risks had moved towards commercial property markets.

"Commercial property yields have compressed across a range of market segments and there are some questions over their sustainability at these levels once global interest rates normalise," the RBA said.

S&P senior director for corporate ratings Craig Parker said the agency was trying to factor in how the weight of money was increasing the value of commercial property assets but that it was also "focused very strongly on the cash flow".

"There has been a disconnect between asset values and rental returns. The office market costs an enormous amount of money to retain tenants," he said.

Mr Mirams also echoed the RBA's recent concerns on apartment oversupply and the possibility of softer prices.

"When you start to see supply three times the norm you have to ask the questions. Statistically it looks horrifying but I think part of it is playing catch-up."

S&P directors Alisha Treacy and Shared Jain outlined their assessment of the financial strength of the loans underpinning the housing and apartment market saying that arrears were still well below the long-term average.