This week, Brisbane-based AREIT Cromwell Property Group announced it had sold another major office asset, highlighting the burning issue of whether Australian commercial property is overpriced.
Cromwell, led by CEO Paul Weightman, has been a reliably counter-cyclical investor for a decade, calling property bubbles and selling assets while others have fallen into the trap of borrowing excessively to buy at great cost to investors.
Cromwell’s decision to sell its office tower at 100 Waymouth Street in Adelaide for $73 million, comes as the Reserve Bank also warns that property may be overpriced.
In a speech earlier this month titled The Risk Environment and the Property Sector, RBA assistant governor Malcolm Edey warned risk was increasing in the commercial property sector.
RBA Assistant Governor Malcolm Edey[/caption]"The commercial property sector is again experiencing strong investor demand, and bank lending to the sector is increasing,” Mr Edey said.
“However, there are a number of signs of increasing risk. Trends in commercial property prices and rents have been diverging over the past few years, with prices continuing to rise while rents have been flat to down.
Rents versus Values[/caption]"As a result, yields have declined. At the same time, vacancy rates have been increasing.”
"As in the housing market, conditions have not been uniform across the country, and they have been noticeably firmer in Sydney and Melbourne than in other centres,” Mr Edey said.
“But in aggregate, the major categories of commercial property have all seen downward pressure on yields over recent years. Strong demand from foreign buyers has contributed to this, reflecting the global environment of low interest rates and 'search for yield.
"The risks appear manageable at this stage, but they underscore the need for sound lending practices and for appropriate prudence by investors." How transactions have soared[/caption]For its part, Cromwell was already a net seller of assets during the 2015 financial year, selling two assets for $244 million and a further two assets for an additional $99 million post June 30. That does not include the Waymouth Street sale.
CEO Paul Weightman warned at the company’s recent AGM that prices had been artificially inflated by expansionary monetary policy overseas but that this would have to change.
“Australia now ranks as one of the world’s largest destinations for commercial real estate investment with Sydney the fourth most popular global gateway city behind only London, New York and Paris when considering international flows,” Mr Weightman said.
Cromwell CEO Paul Weightman[/caption]“This popularity has been driven by the expansionary policies of governments around the world. Their policies have led to record low interest rates and an unprecedented demand for yield.”
“We believe these policies are unsustainable and will eventually, at some point, have to change,” Mr Weightman said.
As well as taking profits on selected assets in its own portfolio, Cromwell has sharply reduced its property syndication activity, in order to avoid selling assets to its clients at excessive prices.
“Retail funds management earnings were $1.4 million, down from $3.5 million in the previous financial year, mainly due to lower transactional fees,” Mr Weightman said.
“The lower fees reflect our caution with regards to asset acquisitions on behalf of investors at this late stage of the property cycle.”
Cromwell’s pull back comes as another renowned property developer and cycle picker Lang Walker seeks to offload his $2.5 billion Collins Square project in Melbourne, marking his biggest ever sale.
While few are calling the inflated prices of commercial property a bubble – yet – there is plenty of reason for investors to be cautious.
