As money pours into the Australian property market, returns in the commercial property market are now higher than at any other time since before the global financial crisis.

Unveiling the latest version of its PCA/IPD Australia Property Index, which it now produces, investment services outfit MSCI said that on average, investment returns over all commercial property sectors in the twelve months to September averaged 12 percent comprising a 6.9 percent income return through lease of assets and a 4.8 percent return on capital – the highest level of return on record for any twelve month period since the September quarter of 2008.

‘Other’ property, such as hotels, healthcare facilities and aged care and retirement villages performed best, delivering a 17.8 percent return on stronger capital growth whilst the office sector was also a big improver.

Throughout the commercial property sector in Australia, asset values and investment returns are being driven upward as a flow of overseas money continues to roll in.

Earlier in November, the Commonwealth Bank said almost $20 billion worth of transactions had taken place in the first nine months of this year alone, with overseas demand coming from Chinese and Middle Eastern sovereign wealth funds, Singaporean fund managers, and publicly listed property companies and banks from Germany and Switzerland.

Whilst such activity is driving up asset values, it is creating challenges for local investors in terms of finding assets which offer significant value and an acceptable underlying long term yield on investment.

Within the office sector, Sydney and Melbourne delivered returns of 14.7 percent but returns were much smaller (4.5 percent) in resource hit Perth.

Whilst underlying tenant demand is strengthening in Sydney as the performance of the New South Wales economy improves, that in markets like Brisbane and Perth is tanking as resource related clients pull back on demand for space.

Whilst overall investment performance was likely to strengthen over the short term, MSCI executive director, Anthony De Francesco warned of dangers associated with investment activity running ahead of underlying fundamental asset values.

“A clear risk to the asset class remains the increasing disconnect between the strong capital market conditions against somewhat softer space market fundamentals,” he is quoted as saying in the Australian Financial Review.