CBRE: Steady economic growth for 2017, mixed bag for real estate market

CBRE: Steady economic growth for 2017, mixed bag for real estate market

24 March 2017

 

The Australian economy in 2017 is shaping up as more of the same, predicts the latest CBRE Research report 2017 Real Estate Market Outlook for Australia.

CBRE analysts expect economic growth to continue at around 2.5 percent, reflecting steady consumption, but for residential construction and business investment to flatten out. Official interest rates are off the immediate agenda as inflation is expected to rise back toward the RBA target range, while interest rate risks are skewed to the downside.

As might be expected, the real estate market outlook is a mixed bag, presenting both risks and opportunities.

OFFICE

New South Wales and Victoria have limited vacancies and are best placed for rent growth. Brisbane is gradually recovering, while Perth is expected to bottom out this year. Office users continue to search for flexible workplaces that can be redesigned or tuned to meet the changing needs of their workforce.

RETAIL

This sector is facing ongoing headwinds created by weak income growth, population growth, and lower levels of accumulated debt. CBRE analysts expect only moderate rent growth of between 1 to 2 percent across most retail real estate categories.

INDUSTRIAL

Goods consumption is driving growth in wholesales, transport, and warehousing, but construction is slowing and manufacturing is weak.The availability of fewer properties nationally should fuel rental growth in 2017, particularly in Sydney and Melbourne, where tenant demand is robust.

HOTELS

Some areas of the country will struggle due to unfavourable trading conditions and increases in supply. Cairns, the Gold Coast, and Hobart—the star performers of 2016—will continue to improve due to foreign and domestic tourists showing renewed interest in their locales.

RESIDENTIAL

Dwelling approvals and commencements should continue to contract and start to drag on annual GDP growth in 2017. The housing construction boom should last long in NSW where dwelling approvals are holding up better and the market is not oversupplied. Residential price and rent growth have eased, particularly in Brisbane and Melbourne inner-city markets where supply has been high. This is likely to continue in 2107 as significant levels of supply hit the market.

OPPORTUNITIES

  • Create more flexible workplaces that can be tuned to meet the future needs of their workforce.
  • Develop real estate strategies that help occupiers to attract and retain workers who can collaborate more productively.
  • Seek funding from offshore banks and private lenders, instead of local banks who are restricting money supply.
  • Seek commercial and residential opportunities around new railway stations, especially in Sydney where rail infrastructure is expanding.
  • Substantial volumes of large format retail space are up for grabs following the closure of Masters in 2016.
  • Satisfy the growing number of tenants who are seeking functional properties that are also socially and environmentally amenable.
  • Develop new warehouses or retrofit older ones to service the growing logistic sector.

RISKS

  • U.S. government policy could stall global economic growth, adversely affecting those markets that have priced in their expectations.
  • Higher inflation and interest rate expectations could exert upward pressure on property yields.
  • Weaker company profits, especially in Sydney and Melbourne, were weaker in 2016, and this could subdue white collar employment growth in 2017.
  • Australian banks are restricting investor loans, particularly for high-rise dwellings, when record number of units are becoming available.
  • Offshore retail brands could proliferate too rapidly, cannibalising local retailers at a time when sales growth is low.