Prime office income capitalisation rates (cap rate) have marginally strengthened during the course of Q4 2010 as compared with Q4 2009. This is reflected in the graph below showing the average rate as captured in the Sapoa Cap & Discount rate survey conducted in Oct/Nov 2010.
Average cape rates across all commercial property types (including retail and industrial) is 10.37% which is 10 basis points down on a year earlier (10.47%).
To some extent this scenario captures a number of key dynamics including a strong reduction in interest rates over the period interalia long bond yields, scarcity of investment grade stock and benign inflation; however of some concern to investors is the disparity between anticipated rental and expenditure growth rates which is no doubt serving to increase the risk factor and therefore dampen prices. The graphs below show the trends over the past four years and clearly the increase in operating costs can be contrasted against a less optimistic expectation for rental growth under the current fundamentals cycle.
