Despite some similarities to the 1980’s, the Australian commercial property investment market is unlikely to a experience crash due, according to a leading edge white paper by Jones Lang LaSalle released in Sydney yesterday.
JLL’s head of capital markets, John Talbot believes Australia’s to stronger underlying economic and market fundamentals will save the day but warns “there are some storm clouds on the horizon”.
In a paper “The Nineties and the Naughties: Time for Another Commercial Property Crash?” presented at the PCA Capital Market Conference held in Sydney yesterday, Talbot voiced background concerns that may impact on the Australian economy and commercial property market.
“The retail and industrial markets are seeing record levels of new supply as demand eases from the consumer slowdown; changing trends in the workplace are seeing workspace ratios shrink; the interest rate cycle is currently on the rise and a range of ‘mega factors’ such as avian flu, terrorist activity and oil price surges threaten financial markets,” Talbot told the audience.
“2006 retail supply is likely to be the strongest on Jones Lang LaSalle Research’s records,” Talbot said.
“With over 980,000 sqm forecast to enter the retail market, much of it in the bulky goods sector which saw the first rise in retail yields recently in many years. Similarly, Australia’s eastern seaboard industrial markets face their second year of record levels of new supply at a time when the growth in the transport and storage sector has slowed.”
JLL research reveals that Perth and Brisbane are seeing an increasing number of new development proposals as a result of the surge in the office leasing market, however supply is still modest compared to the 1980’s with developers requiring tenant precommitments before construction.
Additionally Adelaide and Canberra will see significant new supply that will push office vacancy rates toward 15% over the next three years.
“Overall, potential threats to the property market are still relatively distant or on a much smaller scale than in the 1990s, with JLL viewing the events as having a low probability of causing significant harm to financial markets,” Talbot said.
“While the performance and rate of growth of commercial property will moderate and may even fall in some sectors, its unlikely there will be a property crash in the next five or so years. Overall, the outlook is for steady positive growth,” he said.
1991 vs 2006
“Current falling vacancies, low interest rates, strong tenant demand and record lows in property yields have some similarity to conditions experienced in 1988, three years prior to the 1991 property crash.
“In 1991, prices fell, driven down by very high vacancies, a liquidity crisis in unlisted property trusts and the withdrawal of overseas investors.
“Today however, economic growth is positive and relatively stable while interest rates are far less volatile than in the late 1980s. Also, in most markets the supply pipeline is well matched to meet forecast demand, valuations relative to equities and fixed interest alternatives are attractive and there is a strong underlying source of demand.”
By Ted McDonnell
