Jones Lang LaSalle’s white paper shows the figures of the 90’s crash were dramatic. With interest rates peaking at 18.4% in 1989 combined with the after effects of the 1987 share market crash, white collar employment in NSW and Victoria fell by 93,200 between 1990 and 1993. As a result, the national CBD office vacancy rate rose from 3% in 1987 to 21.2% in 1992.
Co-author of “The Nineties and the Naughties: Time for Another Commercial Property Crash?” Manager of Forecasting Services, John Sears adds that interestingly it was the volume of new supply that was a greater driver of the market than precommitment levels.
“As figures show that precommitment levels in Sydney and Melbourne were not greatly different to the levels of today,” Sears added.
Also, since December 2003, interest rates have only moved 75 basis points, contrasting sharply to the 1980’s where volatility was closer to 1,000 basis points.
“Most forecasters expect the stability to continue with interest rates varying between 5% and 6% over the next five years or so,” Sears said.
“Similarly, Australia has been able to achieve stability in economic growth and inflation. Australia has seen 15 consecutive years of positive economic growth, and Access Economics expects stable growth averaging 3.5% pa until the end of the decade. Retail trade is also expected to pick up following the 2005 slowdown,” he said.
“Today’s supply cycle is also a long way from the excessive new supply and over development experienced in 1988. In 1988, new space equivalent to 17.5% of the total CBD stock was under construction nationally. The new supply came on line just as demand crashed from “the recession we had to have,” Sears added.
“With the exception of Adelaide and Canberra, Australia’s current office market supply is expected to be well balanced by demand. Jones Lang LaSalle’s Office Market Gauge suggests that by 2011, on current forecasts, the supply/demand equation for Australian office markets indicates a slight shortage of stock nationally, making it primarily a landlords market,” he said.
“A key change accounting for the difference in volume between the 1980s and today is office demand volatility. Unlike interest rates and the economy, office demand is today more volatile than the 1980s. Currently, we are now only entering our third consecutive year of positive national office demand. This follows demand slumps in 1991, 1997 and 2001. By 1988 we had six consecutive years, which gave developers and financiers more confidence in the outlook,” he said.
Additionally, relative property returns for investors are far more attractive today than post 1987. Property yields at the time were near 5% compared to fixed interest rates of around 10% to 15%.
JLL Research shows that currently the property risk premium are either fair to good value despite recent yield compression compared to cash.
Talbot concluded that there is now less reliance on offshore interest in the investment market, as today there is strong steady domestic demand from the superannuation guarantee.
By Ted McDonnell
