THE year 2016 has started in a similar fashion to 2015 with global uncertainty, volatility in the financial markets dominating the headlines and overshadowing a sustainable growth story in Australia, according to experts.
Urbis chief economist and director Nicki Hutley, who was speaking at the Australian Property Institute and Real Estate Institute of Victoria State of the Market, noted that bad news has consumed all the attention, including those of world leaders.
Hutley said the economy, chronic fiscal imbalance, income disparity and unemployment used to rate highly, but these topics have taken a backseat as global leaders shift their focus onto immigration, interstate conflict and continued failed action on climate change.
Hutley acknowledged there were risks in the global economy, namely the GDP slowdown in China, crisis in the Euro zone and Japan, where policymakers have adopted a negative interest rate in order to stimulate the economy.
Despite those concerns, global real GDP growth is expected to track above the long-term average of 3.4% in the coming year. Although it would be led by the emerging markets and developing economies, rather than advanced economies, where the rate is forecast to over just over 2% over the next four years to 2020.
Hutley said Australia is well place, with a GDP growth forecast around 2.5% or even 2.75-3% over the coming 12 months period, driven by increased exports due to the lower Australian dollar, business investment outside of mining picking up slightly, the housing market and modest consumer spending.
The bad news cycle has also taken the limelight away from the growth story in the office market, particularly in Sydney and Melbourne.
According to JLL’s Victorian strategic research manager Annabel McFarlane, the lead indicators are starting to firm and Melbourne’s office market is experiencing “Back to boom time” demand, with 128,500 sqm+ of net absorption over the past 12 months, with vacancy also tightening and expected to hit a cyclical low in 2016. The figure is significantly higher than long-term average of 59,300 sqm and would have been more elevated if it had not been for the inclusion of large sublease vacancy from Leighton and Sensis.
Sydney recorded a 144,800 sqm net absorption.
McFarlane said there is a diverse range of tenant enquiry in the market and there is evidence of solid rental growth.
Both cities are leading the way, compared to Brisbane with 26,600 sqm and Canberra with 18,000 sqm.
Adelaide and Perth were the only cities to record negative net absorption of -1,950 sqm and -19,000 sqm respectively.
McFarlane said the pressure on Melbourne’s office market in the near future would be Victoria’s population growth, where 100,000 people per year is the new normal, and the resulting demand for residential development, which will reduced office supply.
According to JLL, between 2008 and 2015, all but one Melbourne CBD development site sales was for a pure commercial project, which was 447 Collins St – ISPT sold to Cbus. And it is likely that project will become mixed-use and involve residential apartments.
“Sites that are sold without planning permission have often been to residential developers,” McFarlane said.
At the same time, transaction volumes in Melbourne continue to go higher as new sources of capital emerge, pushing yields down further. According to JLL, prime grade asset yields have compressed by 100 basis points in the past 18 months.
Moreover, there is scope for further yield compression, even in the suburban markets. For example the sale of 913 Whitehorse Rd Box Hill to FG Asset Management for $156 million on a 5.64%.
Similarly, the retail sector is showing very strong prospects, experiencing strong demand with $8.4 billion worth of properties changing hands, according to JLL national director, valuations & advisory, Stephen Andrew.
Andrew said market fundamentals are also improving, in particular CBD centres and large format retail, which is back in favour. Investment conditions are becoming increasingly competitive and major assets are scarce. As a result, refurbishment and expansions remain a key focus for owners, with over 1.5 million of retail space either under construction or approved in the next two years.
In Victoria, Andrew said there is great demand for new neighbourhood centres over the next five years to cope with the population growth.
According to JLL, 26 new centres will need to be built totalling around 168,000 sqm to cater for the 503,000 new residents. Currently there are 74,840 sqm of space either under construction or planned.
On the industrial front, Colliers International’s associate director of research Anneke Thompson said incentives are stabilising.
However, Thompson said, the abundance of land supply in Melbourne means it will be awhile before rents begin to recover. In December, it declined by 1.23%.
Prime rents across Melbourne averaged $100 per sqm, however when excluding the city fringe, rents are around $80.
On a positive note, incentives are steadily declining. As at December, city fringe and outer east hovering around 15%, the west at 17%, south-east at 23% and north at 19%.
Finally WBP Property Group chairman Greville Pabst identified mixed results in the Melbourne residential property market.
Pabst expects inner-city houses, within 10km and within 11-20km of the city, will be the strongest performer with 5-8% price growth. Prestige growth will range between 1-7%.
Apartments will be a mixed bag, with new apartments forecast to decline by 4% or flat growth, whilst established prices will grow between 1-5%.
The mortgage belt will experience flat to 2% growth and holiday homes is predicted to record flat to -4% growth.
Pabst said there are risks in the off-the-plan sector, where the market could suffer from oversupply.
He pointed to a survey WBP conducted of 1,794 apartments sold between December 2009 and August 2015.
The study revealed half (50.33% to be precise) of all off-the-plan purchases were valued at a minimum of $1,000 less than purchase price.
Of those properties valued at less than purchase price, the average loss was approximately $40,000, representing a median loss of 9.37% between time of purchase and the valuation date. In real terms, this loss equates to the cost of a typical deposit, which most people take several years to save.
Off those properties with a negative deviation, losses ranged from $2,000 for a one-bedroom apartment in South Yarra to a loss of $623,000 for a two-bedroom apartment in Abbottsford – representing a loss of 0.54% and 46.13% from the original purchase price, respectively.
Off those properties with a positive deviation, gains ranged from $4,133 for a two-bedroom apartment in Glen Huntly to a gain of $175,000 for a two-bedroom apartment in St Kilda East. In percentage terms these gains represent an increase of 0.74% and 30.43% on the original purchase price, respectively.
Australian Property Journal
