This article is from the Australian Property Journal archive
AN analysis over the past two decades by CB Richard Ellis has revealed that industrial rents could be a potential indicator of future economic trends.
CBRE forecasting consultant Jatin Chand said changes in Grade A warehouse rents generally preceded changes in the national unemployment rate and CPI inflation.
A key finding was that industrial rent changes have historically led real GDP in Sydney and Melbourne by between one and two quarters.
“In particular, the behaviour of net effective rent in Sydney suggests that it may be a leading indicator of the possible presence of an upcoming Australian recession.
“For example, when the economy registered two consecutive quarters of negative real GDP growth and fell into recession in September 1990, real net effective rent had already started to fall in Sydney from $146/sq m in December 1989 to $140/sq m on September 1990. Real net effective rent proceeded to keep on falling until it reached its bottom at $105/sq m in December 1994, continuing to fall well after the economic recovery that followed the downturn,” Chand pointed out.
The CBRE Viewpoint report points to the fact that in economic booms, tenants are likely to experience good future profitability, especially when consumer confidence and spending is strong. During these periods, tenants often actively seek to increase the stock of goods in their warehouses to meet forecast future demand and landlords may charge higher rents in order to extract part of that profitability.
Conversely, during tough economic periods inventories diminish, vacancies arise and landlords may respond by dropping or stabilising rents and increasing incentives.
“Net effective rent leads, and is mildly positively correlated with inflation, in Sydney, Brisbane and Adelaide by one to three quarters. This finding may suggest that rental behaviour may provide an insight into the conduct of future monetary policy.
“Rising inflation is a key determinant in whether the RBA takes action to raise the interest rate. As rising industrial warehouse rents in these three states precedes the increase in national CPI inflation, industrial rent changes may signal that a future inflation increase is likely and thus, monetary policy tightening in response to this may also be on the way,” he continued.
Chand said correlations also suggested that net effective rent led the national unemployment rate by one to three quarters in Sydney, Melbourne and Adelaide. In Perth, net effective rent was contemporaneously correlated.
Relatively stronger negative correlation was recorded over the quarters from March 1981 to September 2008 for Melbourne and Adelaide (-0.38) than Sydney (-0.29), Perth (-0.27) and Brisbane (-0.14).
TABLE 1: CORRELATIONS IN GRADE A WAREHOUSE RENT AND KEY MACROECONOMIC VARIABLES
|
Real net effective rent in |
Real GDP |
National Unemployment Rate |
National CPI Inflation |
|
SYDNEY |
leads GDP by 2 qtrs (0.21) |
leads by 1 qtr (-0.29) |
leads by 1 qtr (0.33) |
|
MELBOURNE |
leads by 1 qtr (0.23) |
leads by 1 qtr (-0.38) |
lags by 4 qtrs (0.21) |
|
BRISBANE |
lags by 3 qtrs (0.14) |
lags by 1 qtrs (-0.14) |
leads by 1 qtr (0.25) |
|
ADELAIDE |
lags by 1 qtr (0.20) |
leads by 3 qtr (-0.38) |
leads by 3 qtrs (0.30) |
|
PERTH |
lags by 1 qtr (0.12) |
contemporaneous (-0.27) |
lags by 3 qtrs (0.14) |
Chand said a factor sometimes overlooked is that industrial rental data across the states may reveal more about the behaviour of key macro economic variables such as inflation and the national unemployment rate than vice versa.
“We would recommend that greater attention be paid towards collecting a broader set of statistics in the industrial sector as it may reveal important insights into the Australian economy,” he added.
Australian Property Journal
