Rising yields weigh on capital values

Although there have been signs that economic activity has improved in Q3, the slowdown in the commercial property market looks set to continue. In July, all-property rental values barely grew and yields rose across most sub-sectors. (See Chart 1.) Admittedly, there was some stabilisation in shopping centre rental values on an annual basis, while yields actually fell on the month. But, in our view, shopping centres have the bleakest rental prospects so we do not expect this to mark the start of an improving trend. Nevertheless, with industrial returns slowing to 10% p.a, the divergence between total returns across sectors has started to close.