COMMERCIAL property sentiment has moved further into positive territory, still underpinned by the hot industrial property market while the office sector was positive for the first time since the beginning of COVID.
The latest quarter NAB Australian Commercial Property Index rose to 11 points in the March quarter, building on the gains seen at the end of 2021 when the index moved back into positive territory for the first time in two years. A reading of 0 is considered neutral.
Industrial sector sentiment softened slightly but remained elevated at 57 points as demand for logistics space continued unabated and drove accelerating rental growth, while the office index was positive (10 points) for the first time since early 2020, and in all states bar South Australia/Northern Territory.
The CBD Hotels index improved to 0 pts, up from -25 pts in the December quarter, with occupancy rates lifting as domestic and international travel resumed. Retail market sentiment remained weak at -15 pts amid ongoing structural challenges, but its lift from -20 points has it sitting at its highest level since the June quarter of 2018.
Forward-looking indicators were more optimistic. The 12-month confidence measure improved from 13 to 19 points and the two-year measure from 23 to 29 points, both now back in line with survey averages and at their highest in four years. The confidence is being driven by the industrial sector, supported by lifts in the office and CBD hotels markets.
Industrial continues to lead capital growth prospects over the next one to two years (3.1% for both timeframes), headed by NSW, and office values are also tipped to grow faster (1.0% and 1.8% respectively), led by Queensland. The outlook for CBD Hotels was also revised upwards (0.8% and 2.3%), but the market expects a small fall for retail in the next year and flat in two years’ time, with returns weakest in Victoria.
According to the survey respondents, office vacancy rose from 9.9% to 10.1%, but will come back to 9.5% and then 9.0% in next one to two years, with lower, but above average, vacancy in all key states. Retail vacancy was to 7.5% but will also drop in next one to two years, to 7.1% and then 6.4%.
Industrial vacancy lifted slightly from a survey low of 3.8% to 4.0% but developers are reportedly unable to keep up with demand for warehousing space. NSW vacancy was just 2.8% and in Victoria it was just 3.4%. A special survey question showed supply chain and shipping issues played a “significant” role driving demand for warehousing space as retailers and logistics companies tried to stockpile goods to hedge against these problems (6.7 points out of 10). Rents in the sector are tipped to rise 3.7% and 4.1% over the next one to two years, with particularly rapid growth predicted along the eastern seaboard.
Rental growth is expected to resume in office markets in next over the next one to two years (0.6% and 1.4%), with QLD leading. Retail rents are expected fall futher, but at a slower rate (-1.1% and -0.2%).
The number of developers expecting to start works within the next 18 months fell from 80% to 88%, below the survey average of 85% but well above the low of 68% in the middle of 2020.
Despite the prospect of rising interest rates, a net -13% of all property professionals said it was harder to obtain debt in the March (albeit up from -19%) and -9% equity (down from -7%). A net -23% see debt conditions worsening in the next three to six months, with a net -10% also expecting equity funding conditions to worsen.
Special survey questions also found COVID support assistance packages for commercial rent deferrals and reductions did not have a significant’ impact on commercial property leases (4.1 points out of 10), and low yields are playing a “significant” role in driving commercial property market sales (6.6 points out of 10).
