Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 227

What is happening in Australian property?

A recent Bank of America Merrill Lynch listed property (AREIT) conference in Sydney brought many offshore investors together to meet the AREIT CEOs and management teams. Panels discussed topics including how to keep shopping malls relevant, the strength of the Sydney commercial market, policy impacts upon the residential sector and capital flows. Meanwhile, Myer released its revised strategy, offering insights into the department store sector. The key points that I took from these updates included:

Retail

  • Successful retail assets will be ‘urban living rooms’, where people go to socialise and get kids out of the house as well as to shop. Landlords are doing whatever it takes to lure people, with some creating architectural features so that the millennials can take their Instagram pictures. Frasers has launched a new Palace Cinema at its Broadway Sydney development (called Central Park) that comprises ten screens, plus three Platinum cinemas and multiple lounge and bar areas. The lounge and bar areas provide food utilising product from existing retailers in the centre in an attempt to make everyone a winner.
  • Online retailers don’t necessarily have to open physical stores, but it does help cement the brand. The great advantage of online retailers is that they know where their customers are so they can target their strongest markets by opening a physical presence nearby, typically a collection store. There is acknowledgement that the best way to convert a customer is to have a really good physical experience.
  • Mirvac commented that some literature regarding the demise of retail underplays the need for human connection. People don’t buy some items online, such as clothes, and then stay inside their home. They go out to showcase their goods. People need people. Mirvac has introduced a nanny service in some centres, whereby either the nanny looks after the kids or the nanny comes along to shop. The average spend increased four times with the service.

Residential

  • Westpac has been surprised about the lack of defaults thus far in the apartment markets. They’ve seen good speed to settlement with Melbourne quicker than Sydney. Some developers have been caught in Brisbane and Melbourne in cases where the banks were paid, but the developer struggled to get their equity back. It is expected there will be more issues next year.
  • Around half the development sites 10 kilometres from Sydney and Melbourne are owned by Chinese interests who paid full prices. Some have come to the market seeking to get their money back (via an exit). Local players are sitting back and waiting for an excellent deal.
  • Non-traditional financiers have entered the market, beating the banks recently to provide debt. One recent deal in Bondi went to a party backed by a US Teachers Pension Fund.
  • Sales remain strong with Stockland and Mirvac both reporting good starts to FY18.

Office

  • After many decades of lacklustre growth, Melbourne is looking attractive. It offers cheaper rent and much lower capital values versus Sydney, albeit the cap rates are tight. Docklands is now largely developed which means supply shocks should not be as significant as in the past. It's largely local investors buying in Melbourne as offshore buyers still want Sydney.
  • Expect some more REITs to sell Sydney assets with pricing cyclically high. A few expected deals include 20 Hunter St, Sydney which was bought in 2013 for about $100 million, now expected to achieve a sale price between $180-$200 million. Then there's 1 Castlereagh St Sydney that was acquired for about $70 million and could reap around $200 million.

Capital flows

  • Australian real estate continues to attract massive amounts of global capital. An Australian working in Asia said that everyone loves the Australian market but when he arrives home, locals are talking it down.
  • It's not a homogenous cycle with different rental conditions within sectors. For instance, in the office market, Sydney is in the latter stages of the rental cycle and Perth is at the bottom. In retail there are tough conditions and the industrial is mid cycle.
  • In relation to cap rates, there's an argument for this environment to continue ("lower for longer" or as Charter Hall called it, the "Arctic midnight").
  • The key issues in past downturns has been oversupply of space, or too much debt. Pleasingly, Australia is well placed on both fronts.
  • REITs are happy to develop given comparable pricing for new assets.

Myer and its 128-page strategy update

Myer released its strategy update, recalibrating its prior sales targets due to retail sales growth slowing and declining footfalls in malls. In relation to AREITs, they will have reduced their footprint (m2) by 10% in FY18, having already closed three stores and handing back space in four stores, with an additional three store closures to occur (Hornsby, Belconnen and Colonnades). Myer acknowledged it was a tough retail environment but still have growth targets (revised down).

There have been some bad news stories out of the US with JC Penney the latest to struggle but Myer tried to quell the pain by highlighting that Australia has less department store space per person than in other developed countries, plus we have population growth. AREITs have been dealing with this issue for over a decade, with most malls reducing their exposure to department stores. However, the long-term contractual leases in place mean that Myer is liable to pay rents for many years to come.

 

Pat Barrett is a Property Analyst at UBS, a sponsor of Cuffelinks. This article is general information and does not consider the circumstances of any investor.

 

  •   16 November 2017
  •      
  •   

 

Leave a Comment:

RELATED ARTICLES

Reporting season winners and losers in listed property trusts

Focus on quality yield, not near-term income

A-REITS are looking at M&A activity again

banner

Most viewed in recent weeks

Why spending more in early retirement can improve lifetime income

Conventional wisdom encourages retirees to preserve superannuation. But if those likely to qualify for the Age Pension later in life spend a little more today, it may deliver higher lifetime income and a more stable retirement.

Testamentary trusts have secured the CGT exemption

Treasury’s latest CGT reform draft delivers a win for testamentary trusts and deceased estates, exempting estate-derived gains from the 30% floor. However, questions on death and divorce rollovers remain unresolved.

Meg on SMSFs: What do we think about reversionary pensions these days?

Reversionary pensions have long been a staple of SMSF estate planning, but are they still the best option? Meg Heffron revisits a once-clear favourite and asks whether changing super rules have shifted the balance.

Is it time to bail on Australian stocks?

For generations, Australian investors have backed banks, miners and dividends. But has that loyalty come at a cost? A look at the numbers raises an uncomfortable question about where future returns will come from.

How does the 4% rule stack up?

The 4% rule has long been retirement's gold standard. But after a difficult period for investors, fresh analysis suggests a more conservative approach may significantly improve the chances of making savings last.

Testamentary trusts survived the trust tax. The drafting battle has just begun.

The fight over testamentary trusts looked settled. Then the draft legislation arrived. Hidden in a technical detail is a question that could force many families to rethink wills they thought were already future-proof.

Latest Updates

Planning

How the typical Australian Family could save $844,350 in taxes

The value of a testamentary trust is not determined by wealth alone. Depending on circumstances, it can reduce the tax burden on inherited income, create efficiencies and help build intergenerational wealth.

Superannuation

There's a reason why your super is locked up until your 60s

For decades, it seemed settled. Then one controversial idea reignited a debate that could reshape the financial future of millions. The real question isn’t who’s right or wrong, but whether a long-held assumption deserves another look.

Property

The housing slide could become a crash

House prices are sliding across Australia, yet the most dangerous ingredient for a housing crash is still missing. If job losses surge amid growing economic risks, today's correction could become a historic property downturn.

Retirement

Under-retiring: The greatest retirement risk in a generation

Two retirees. Similar savings. Completely different lives. New research from Challenger reveals why some Australians confidently spend in retirement while others hold back and the overlooked factor shaping retirement decisions.

Five risks to watch in markets

Things you may often hear are: a recession is around the corner, markets are overpriced, the AI sector is about to flop at any moment. It’s like the never-ending laundry pile that sits in my house, it never really disappears.

Investment strategies

Do you qualify as ‘rich’?

What does it mean to be 'rich'? For something so universally desired, it is surprisingly difficult to define. That ambiguity creates a challenge for investors and raises a bigger question about what financial success really looks like.

Investment strategies

If you’re worried about your bond portfolio, you’re missing the point

Most investors think they know what bonds are for. But when markets turn volatile, a surprising misunderstanding can lead to costly decisions. Here’s the overlooked lesson that could change how you view your portfolio.

Alliances

  • ASA-Logo-RGB-ActiveGreen-web.png

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.