The Commonwealth Bank of Australia has lowered its exposure to both commercial property and apartment developments as other investors pile in to find better yields.
In the bank's first half results posted on Wednesday, a scroll through the slides reveal it has lowered its exposure to apartment real estate by 23 per cent to $4 billion.
It says there is a weighting to Sydney with developments diversified across the metropolitan area.
CBA's commercial property exposure has declined from about $72 billion to $67 billion in the six months to December, 2017. The balance is 86 per cent to investors and real estate investment trust with the remainder in developments.
There is a 55 per cent weighting to NSW and 19 per cent in Victoria. Retail and office investments are the preferred sectors, while impaired exposures is less than 1 per cent.
But while the bank has pulled back, other investors are diving in, head first.
According to Shrabastee Mallik, senior analyst capital strategy at Savills Australia, aggressive competition for limited assets drove yields to record lows with multiple sales transacting at yields below 4 per cent.
Ms Mallik said foreign investors represented the lowest proportion of all purchasers since the beginning of the property boom in 2013, as a result of fewer prime grade, 100 per cent holding assets available for sale. Instead, investment activity in Melbourne and Brisbane office markets showed greater activity from foreign investors.
There is now a notable spread between Brisbane CBD and Sydney CBD yields with Sydney CBD’s standout performance at a tenancy level driving yield compression well below other capitals.
In 2017, foreign purchasers made up just 35 per cent of total buyers compared to 43 per cent in 2016 and 53 per cent in 2015. Interestingly, all foreign buyers in 2017 originated from Asian countries.
“The vacancy rate in the Sydney CBD office market, at 4.6 per cent, was the equal lowest,with Melbourne CBD among the national capitals, which has driven exceptional performance in both capital values and rental growth, with the vacancy rate in the CBD’s Core precinct recorded at 3.9 per cent.,'' Ms Mallik said.
“With owners of Prime quality buildings more likely to hold onto their assets for income return purposes, intense competition for secondary grade assets led to capital values growing by 47.4 per cent over 2017, unlike a level of growth unrivalled anywhere globally. Prime grade capital values grew by 17.9 per cent over the year to December 2017.''
Savills research says signs of the strengthening economy are evident with employment growth at its highest levels since 2008, with a resurgence in full-time employment growth and steady growth in professional job advertisements likely to keep demand for office space buoyant in 2018.
According to CBRE, about US$53 billion of real estate private equity capital it tipped to flow into the Asia Pacific property assets by 2020. China, Japan and Australia will be the top three destinations for the capital deployed in the region.
Core or core-plus funds have mainly focused on Australia, where core assets have accounted for more than 75 per cent of transactions.
''However, we’re anticipating heightened interest from value-add and opportunistic funds, with Sydney and Melbourne to remain the key area of focus,” Michael Andrews, CBRE NSW state director, capital markets, said.
“Increasing rental income will be a key driver of value appreciation in the coming years, with asset management and enhancement set to take on a crucial role in propelling rental growth and unlocking hidden value,” Mr Andrews said.