12 month outlook for commercial property

12 month outlook for commercial property

31 August 2017

With a hot leasing market, tightening yields and valuation uplifts across the country, what are some of the key trends for the year ahead? REA Group Chief economist Nerida Conisbee shares her commercial property predictions.

1. Less competition for assets

While investment volumes are down, this is being driven by a lack of stock, as opposed to there being fewer buyers. Competition for commercial property is hot, but there’s good news on the horizon as the market is likely to cool over the coming months.

Firstly, new capital controls have been introduced by the Chinese Government and we’ve started to see the overflow effect on investment levels in Australia. With offshore investment in property on China’s restricted list, this will reduce the number of foreign buyers looking at Australian property.

Secondly, some investment groups consider now to be the top of the investment cycle and are taking a ‘wait and see’ approach to the market. This will continue for some time and we can expect it to reduce investment demand.

2. Price growth to stabilise

At the peak of the previous investment cycle, yields for many office buildings dropped below the 10-year bond rate. The gap between both is still substantial, which supports a more sustainable market. With price growth moderating, we can expect to see a prolonged investment cycle that is likely to be pushed out further than a rapidly overheating market.

3. Commercial development getting going

While residential development is starting to cool down, commercial leasing cycle is only just getting started, which will drive more office development. Sydney and Melbourne will be the main beneficiaries of growth, while other markets that already have high vacancy rates will likely see limited activity over the coming 12 months.

4. Amazon to continue impact on shopping centres

Amazon has the potential to have an enormous impact on shopping centres as more retail owners look to move their business online. It’s therefore likely that we’ll start to see more shopping centres come onto the market, however not all centres will be impacted equally or immediately. Those that offer lifestyle benefits are likely to perform better than those centres that shoppers would more happily avoid if given the opportunity.

5. Continued threat from overseas instability

The US presidency continues to become more chaotic and the UK economy is slowly grinding to a halt ever since the Brexit announcement. At the moment, Australia continues to show solid economic growth and a strong commercial property market. However, it’s unlikely we will remain immune to what is occurring overseas. Whether this will be because of rising interest rates in the US, or disruption to global trade, the threat of geopolitical risk will continue.

6. Tech continues to drive tenant demand

Technology companies are a huge driver of tenant demand, which we can expect to continue over the coming years. While multi-national tech players seem to show a preference for Sydney’s CBD, local firms are making a move to Cremorne and Richmond in Melbourne’s inner east.

Both Melbourne and Sydney offer what these groups are now looking for: access to staff. Office space designed specifically for these groups will follow with heightened demand.

The increase in co-working/shared space is testament to the fact that tenant demand is changing. And this growing trend has not gone unnoticed by the big Australian REITs, including GPT Group and Dexus to name a few.