Australia | Apr 22 2010
By Chris Shaw
The global financial crisis or GFC had a significant impact on the Australian commercial property market, BIS Shrapnel noting both the Sydney and Melbourne markets over-reacted in terms of rents and yields.
In Sydney prime gross effective rents fell by almost one-quarter as a result of the GFC, while in Melbourne BIS notes the decline began even earlier as net effective rents slumped by 30% in the first half of the decade.
As Lee Walker, BIS Project manager and author of the report “Sydney Commercial Property Prospects 2010-2020” notes, prime leasing incentives in Sydney were quickly ramped up to an average of 2.8 years rent-free equivalent as landlords panicked in the wake of the crisis.
BIS points out investment markets in both cities also overreacted, as prime grade yields blew out by 160 basis points in Sydney and by 155 basis points in the Melbourne market as a consequence of the GFC.
Current evidence is more positive though, BIS noting the office markets in both cities appear to be stabilising as leasing incentives are on their way down and yields have plateaued. As Maria Lee, BIS senior project manager and author of the report “Melbourne Commercial Property Prospects 2010-2020” notes, making up the ground lost during the GFC alone will result in solid gains in rents and prices.
As well, Lee suggests the improving market demand/supply fundamentals of late should mean lower vacancy rates and further gains in rents and values. A lack of new supply should assist in this regard, as BIS points out pre-GFC projects are now being completed and there has not been as much development of late.
With limited supply there should be falling vacancy rates, a trend BIS expects will swing the balance of power back to landlords, allowing them to cut leasing incentives. In such an environment, the group expects effective rents will more or less double, peaking in 2015 in Melbourne and 2017 in Sydney.
As rents rise through the middle of the decade, BIS expects investor expectations for capital growth will be reignited, so driving down yields. In the report Lee expects the combination of rising rents and firming yields will lead to a more than doubling in capital values.
An improving market is in line with the expectations of National Australia Bank, which has released its Quarterly Australian Commercial Property Survey. The bank's review suggests the office market should be the best performer across commercial markets over the next year, followed by the retail market and then the industrial market.
The bank's survey shows Melbourne is expected to be the best performing market across all sectors over the next year, while Sydney should improve solidly. Brisbane's office market is viewed as the worst, while performance in Perth is expected to get a boost from the flow on effects of new resources related projects.
Some divergence in performance expectations between different grades of stock is expected according to the results of the survey. In the bank's view this reflects the fact some owners have now refinanced and so are looking to hold onto flagship assets while selling down non-core assets.
The survey suggests capital values will rise across all sectors, with forecasts indicating gains of 3.3% over the forecast period in the office market, 2.4% in the retail market and 1.8% in the industrial market. Rents are expected to follow a similar path, with office seen as overtaking the retail sector in terms of performance expectations during the six-month forecast period.
The improvement in performance is expected to become apparent in the third quarter for all markets except industrial, where the improvement is seen as likely to become evident in the fourth quarter.
The bank notes the intentions of those in the market suggest a corresponding improvement in activity across the commercial property sector, as 76% of developers indicate they will commence new works in the next 12 months.
Those in the market expect debt sourcing barriers will ease over the next three months, while 50% of survey respondents plan to source more debt in the next six months. As well, the survey showed the percentage of respondents ruling out any debt additions over the next year is falling quickly, having declined to 22% from 46%. At the same time, procuring equity is seen as becoming more difficult.
The bank's survey shows the top five concerns for market participants are the availability of stock, the ability to source debt, the level of interest rates, the level of business costs and the availability of equity for new projects.
The survey also contained some information on the outlook for residential property prices, showing house prices are expected to rise by between 4.95-5.80%. Melbourne leads the way with an expected average increase of 5.8%, followed by Perth at 5.6% and Adelaide at 5.3%. Those coming in below the national average of 5.2% include Canberra at 5.1% and Sydney at 4.95%.
