Media Release – 10 September 2010
Speaking at the First National Commercial conference at Hyatt Sanctuary Cove, BIS Shrapnel senior projects manager Maria Lee today forecasted good times ahead for the Australian commercial real estate market, despite the expectation of continuing bad news from the US and European markets over the next few years.
‘Recovery is already underway and the markets have had their shakeout. The risks of overvaluation are gone and most property sectors are now undervalued. Instead, there is now the prospect of rising, not falling prices over the next few years’ says Ms Lee.
After a round of equity raisings last year, major investors have recapitalised, reduced their debt levels, and building has virtually stopped. While the risk of oversupply has not entirely disappeared, they’ve greatly diminished.
Many commercial property markets have seen peak vacancy rates now and are in recovery mode. With very little supply underway, the risk of oversupply is unlikely to arise again for quite some time. This means good times ahead for commercial property as leasing and investment markets recover and there will be some great business opportunities for commercial agents.
European and US economies are anticipated to stay weak for quite a long time so people shouldn’t be disturbed by bad news emanating from those sources. We’re now much more closely aligned with Asia and Asia’s doing well.
Maria Lee characterises the office market as being similar to the 50 metre race for a group of under sixes.
‘They’re all lined up on the start, waiting for the gun. The gun sounds; some children head straight down the course – they know where they’re going. Some are blocking their ears because they don’t like the sound of the starting gun, then, with a delayed reaction, they set off down the course as well. But, there are always a few children who set off in the wrong direction but eventually they do all reach the finish line.
‘So in the office market race, Melbourne is the front-runner. Sydney and Adelaide are heading in the right direction; Canberra has definitely taken a step backwards. Brisbane and Perth look as though they are heading in the wrong direction at the moment. However, the point is that they’re all going to get to the finish line but it’s just a question of timing’.
Office markets around Australia are already, or shortly will be entering, an upswing phase of the cycle. The key to recovery is lack of supply, which is not expected to pick up soon because there are too many obstacles. Rents are too low, yields are too soft, finance is expensive and difficult to get hold of, and although tenant demand has picked up, it is still difficult to secure sufficient tenant pre-commitments to get a building over the line.
Supply is not expected to really kick in until between 2012 and 2014/15, in some markets. On average, supply is unlikely to catch up to demand until mid-decade at the earliest, so there will be a sustained period of tightening markets and rising rents.
The scene is set for substantial rises in capital values over the next five to seven years.
Underlying demand for industrial property is recovering. Businesses are re-stocking, import and export activity has picked up, and that bodes well for warehouse space. Meanwhile manufacturing has troughed but manufacturing output is forecast to grow more quickly over the next five years than it did over the last five, which also bodes well for the demand for factory space.
Firming yields were the main driver capital gain in the retail sector until 2007, however yields have since softened by about 95 basis points for regional shopping centres, 180 basis points for sub-regional centers, and a little bit less than that for neighbourhood centres.
Retail yields are not expected to firm back to 2007 levels because yields firmed too far in the run up to 2007. What we are now seeing is an unwinding of previous over firming. The forecast is for a mild firming and then cycling within a fairly narrow band. Strong returns will not been seen from the yields side so the emphasis will shift to shopping centres incomes and growing those incomes.
‘In the run up to 2007 you didn’t need to be an expert at retail management, now expertise is needed. For those who have the expertise, there will be good buying opportunities because prices have come off and there will also be mismanaged centres to pick up and good development opportunities.
‘There should be great opportunities for agents to assist landlords and their tenants in leasing space as demand recovers, and also to broker investment deals as property fundamentals continue to improve so we can look forward to much more idyllic surroundings for the next few years at least’.
Issued by: First National Real Estate
For further information contact Stewart Bunn, National Communications Manager, First National Commercial on 0413 624 317
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