This article is from the Australian Property Journal archive
COMMERCIAL property values across Australia have recorded negative in growth in the Q2 2012, according to the NAB Commercial Property Index, which fell to 16 points in June to its lowest level since the data was compiled in April 2010.
According to the index, fewer property professionals expect positive capital or income returns and retail and industrial market participants were most pessimistic whilst expectations also softened in office and CBD hotel markets. Western Australia was the most optimistic state, in contrast Victoria was the most pessimistic.
“Consumer confidence is still seen as the biggest challenge facing property firms. Economic and financial market volatility has again emerged as major concerns as confidence was likely eroded by recent turmoil in Greece and Spain. The extent of concern over interest rates is, however, falling rapidly,” NAB chief economist Alan Oster said.
“The domestic economy continues to pass through a lengthy soft patch as it copes with the restructuring burden from the mining investment boom. Business confidence remains in negative territory and sentiment has not been helped by the continuing disturbances in global financial markets and concerns about Chinese growth. We suspect these factors have also shaken confidence in commercial property markets,” he added.
Property professionals reported negative capital growth in Q2’12 in all property sub-sectors. Capital values for office property fell 0.4% following 0.2% dip in Q1’12. Retail capital values declined 2.3% following a 2.1% fall in Q1’12 and industrial property values fell 2%, in addition to the 1.5% decline in Q1’12. In the CBD hotel sector, capital values declined 0.7%, partly offsetting a 1.6% gain in Q1’12.
“We suspect that the current state of the industrial property market largely reflects weakness in the key drivers of industrial property demand – such as import volumes and manufacturing activity.
“Expectations in the office property market were impacted by another round of concern over the outlook for the Euro-zone, which led to sharp falls in global equity markets and a round of heightened risk aversion. This was also reflected in weaker business confidence in the finance/business sectors in the NAB surveys and ongoing reports that firms are reviewing costs and scaling back expansion plans due to ongoing economic uncertainty,” Oster said.
Gross rents were also reported to be weaker in all markets. Office rents are expected to rise 1.4% over next year and 2.7% in next two years. Industrial rents are expected to stay flat over next year and rise 1.2% in two years. Retail rents are forecast to fall -1.5% over next year and -0.8% over the next two years.
Oster said with rental expectations softening, leasing incentives continue to play a significant role in the retail leasing market. Incentives were also higher in office and industrial property leasing markets.
Expectations weakened in all states except WA, where the index was unchanged at +19 points.
Victorian and Queensland respondents were the most pessimistic, recording a negative index reading of -29 points. South Australia and Northern Territory also declined (-28 points) and New South Wales (-10 points). However SA/NT will be the big improver over the next two years, with the state index rising to +53 points as confidence returns through the flow through effects of the Olympic Dam project.
WA remains the most optimistic, the index expected to rise to +59 points by June 2014. Followed QLD, the index rising to +42 points
Victoria (+17 points) remains the least optimistic, dragged down by much weaker expectations in retail and industrial property markets.
WA was also the most optimistic with regards to office property, the office index rising to +75 points in Q2’12 (+56 points in Q1’12) fuelled by the resources boom.
All other states recorded a lower office index reading, but the index remained positive in NSW (+2 points) and flat in Victoria. In QLD, the state index turned negative (-17 points), as fewer respondents expected capital values to rise, while SA/NT remains volatile (-33 points).
Oster said market supply in the national office and industrial property markets was assessed as “neutral”, but the retail market was “somewhat over-supplied”.
He added that under-supply is expected to emerge in the office market in the next three years and in the industrial market in the next five years and vacancy rates are expected to decline in all markets over the next two years as supply tightens and overall market conditions improve.
Oster said despite soft housing market conditions, the majority of property developers are still seeking to develop projects in the residential space. Although he noted that access to debt and equity was seen as more difficult.
Despite the negative growth, CBD hotels had the strongest outlook, values expected to rise by 1.6% by Q2’13 and 3% by Q2’14.
“The out-performance of CBD hotel property continues to be driven by relatively high occupancy and solid demand from business travellers, which is easily outstripping the growth in new supply.
“Forward expectations in the CBD hotel market have, however, weakened relative to our last survey, in line with uncertainty surrounding international and domestic economies. But, with supply shortages persisting in key CBD markets and buoyant demand for CBD hotel rooms from corporate travellers and increasingly international travellers, long-term expectations for capital growth and room rates are positive,”
Office values are forecast to rise by 1.1% and 2% in the next 1-2 years respectively. Capital values for industrial property are expected to fall by -0.9% over the next year and rise 0.9% by June 2014. Respondents are least optimistic in the retail property space, where capital values are expected to fall by -1.2% in the next year and -0.2% in the next two years.
Overall, fewer survey respondents expect capital values or rents to grow in the next 1-2 years. As a result, NAB’s Commercial Property Index is now also expected to remain negative until Q1’13 before rising to +20 points by June 2013 and +37 points by June 2014 – well below expectations in the March quarter survey.
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