THE outlook for the commercial property market has stalled due to soft business confidence, lower rental returns and higher incentives, according to the 31st Australian Property Institute Property Directions Survey.
API NSW President Tyrone Hodge told Property Review that the results indicate the commercial property market has been at a standstill for the last year. He said business confidence remains soft following the federal election, contrary to expectations that it would improve.
Hodge said it could be due to the continued uncertainty in the global economy caused by the US debt ceiling crisis and partial government shut down.
He added that businesses are also changing their behaviour, looking at how they best utilise their existing space and in some cases reducing their footprint.
“Landlords are also doing more to keep tenants, offering attractive incentives so they can stay put, so we haven’t seeing the movement of tenants. And that has resulted in landlords with vacant space increasing their incentives as well to remain competitive,” Hodge said.
THE API survey found that the Sydney and Melbourne commercial property markets had seen little change in the 12 months to October 2013, while the Brisbane market declined and is currently at the bottom of the property cycle.
“These tough conditions are reflected in the greater incentives required and slowing market value and rental increases at a slower pace indicated by survey respondents.
“Respondents believe commercial property markets in each of these three cities will improve slowly over time, but Sydney will be the strongest performing market in the next two years,” Hodge said.
API Victoria President Justine Jacono said the Melbourne commercial and retail property markets are at the bottom of the property cycle, advancing along the upswing over the next two years.
“Melbourne industrial property is currently on the upswing and predicted to remain at the same stage on the upswing for another year before advancing the furthest of the property classes along the upswing in two year’s time,” she added.
Jacono said that the respondents believe that in one year’s time, commercial property in Sydney, Melbourne and Brisbane is seen on the upswing of the property cycle with Sydney being furthest along the upswing.
Over the next 12 months, respondents expect commercial property values in the Sydney CBD and suburban markets, and Melbourne CBD to increase above CPI, albeit at a slower rate than previously predicted in May survey. However values are expected to decline in the Brisbane CBD and Melbourne suburban.
For new leases, respondents were split on the forecast movement of effective rents over the next six months in Sydney with 56% predicting effective rents (which take incentives into account) will remain stable, while 44% think they will decline.
In Melbourne, 68% of respondents believe effective rents will decline in the next six months and in Brisbane 76% believe they will decline, a strong deviation from the May survey.
Meanwhile 100% of respondents see leasing incentives as a feature of all Australian capital city markets.
Across the Sydney and Melbourne CBDs and suburban markets, and the Brisbane CBD, the majority of respondents reported incentives of between 20 – 29%, with leanings towards incentive levels of more than 30% across prime, A-grade and lower grade properties.
Respondents also see incentives for prime property in Perth to be in the 10 – 19% range, with a leaning to 20-29% levels, which is a strong change from six months ago when they believed leasing incentives to be 0 – 9%. Respondents still see A-grade and lower grade property incentives to be in the 10 – 19% range, but there is a growing tendency towards higher levels of 20 – 29%.
Incentives for Adelaide prime, A grade and lower grade properties are seen to be decreasing from six months ago, with more respondents seeing levels of 10 – 19%.
In Canberra, incentives for prime property are decreasing, with more respondents seeing incentives of 10 – 19%. Overall incentive levels for A-grade and lower grade properties are increasing, with an increased leaning towards 20 – 29%.
Incentives for Hobart prime property have reduced with half of the respondents seeing incentives of 10 – 19%, whereas incentives for A-grade properties are more evenly spread between 10 – 29%. Incentives for lower grade properties are evenly split up to 29%, but there is a leaning to incentives of 10 – 19%.
Hodge said respondents believe that while incentives are continuing to grow, face rents are unlikely to benefit from this growth.
Despite the conservative outlook, Hodge said institutional demand for assets continues to go from strength to strength, particularly from overseas investors.
“The Australian market remains attractive to foreign investors, even if yields were at 6%, it continues to offer superior return to other global markets. Foreign investors are borrowing at 1-2% interest rates overseas and they are hedged against currency movements,” Hodge said.
Earlier this week Axa Real Estate, the property arm of Europe’s second largest insurer Axa, announced it would be spending at least $A500 million to buy four A-grade office buildings in the Sydney and Melbourne CBDs. Axa Real Estate’s global head of Asia Frank Khoo said with currency hedging, it can achieve total return of 9%.
Earlier this month a Jones Lang LaSalle report found $2.4 billion (above $5 million) worth of offices have changed hands in Q3 and $11.0 billion over the past 12 months, and the most active buyers were domestic wholesale funds and offshore investors.
The report predicts new capital sources will continue to flock to Australian.
Property Review
