IPD has announced the fourth quarter 2007 results of the PCA / IPD Australian Property Index. The total return of Australian ungeared direct property investments in the December 2007 quarter was the highest since 1994 (at 5.4%), equating to an annual total return of 18.1%. The previous highest quarterly return during this period was in June 2007.
The annual total return of Australian Offices was 22.3%, compared to only 11.1% this time 2 years ago. Industrial property also performed better with a return of 14.0%, and is now on par with retail property that recorded a 14.2% total return to December 2007.
Cap rates continued their downward trend in the December quarter with Retail, Office and Industrial sectors all compressing between 10 and 25 basis points. The sale of a number of commercial portfolios with firmer cap rates resulted in the valuation fraternity needing to adjust cap rates down. Strong market rental growth (7% for the year) also bolstered high quarterly capital growth in these markets.
The capital growth component of returns is influenced by the proportion of assets valued. Approximately 55% of the sample was revalued this quarter, an increase on the 49% recorded for the December quarter last year. Because not all assets are valued each quarter, a valuation lag is introduced into the Australian Index.
John Garimort, Director for IPD in Australia said, "These direct property returns are in stark contrast to the -13% return recorded for the S&P/ASX LPT300 series (Listed Property Trusts Index on the Australian Stock Exchange) in the December quarter, the accepted LPT leading indicator. Concerns over some of the financial structure employed within the sector together with the equity market influences have highlighted the disconnection between direct property investments and their listed counterpart. However signs are emerging of a decline in the direct property market; a softening of the retail sector has been evident for some time, and secondary office assets are already experiencing reduced returns."