THE recovery of Australia’s commercial property market index continued its slow burn throughout the March quarter, driven by the booming industrial sector.
Despite a fast rebound of the economy and record high business conditions, commercial property market sentiment is still lagging, according to NAB’s latest quarterly Commercial Property Index.
The Index lifted for the third straight period during the March quarter, but remained negative, at -22 points, and well below average (-1 point). A score of 0 is considered neutral, and about 330 property professionals participated in the survey.
Sentiment improved in all sectors, but industrial remains the only sector to weather the challenges of COVID, hitting a survey high 42.
Sentiment remains very week in the office (-30) and retail (-41) sectors, and the ongoing travel restrictions that have thwarted the tourism sector have kept CBD hotels at a low -60.
While overall market sentiment improved across the country, Queensland was the only state to record a positive result.
Overall confidence edged higher. The 12-month measure lifted to -6 and two-year measure to 10, which NAB chief economist Alan Oster said suggests recovery will remain slow with positive outcomes not anticipated until 2022.
“Confidence is being underpinned by industrial (which lifted to survey highs), where the pandemic has created boom conditions due to demand for logistics and warehousing,” he said. The 12-month outlook for industrial listed 20 points to 63, and by 13 to 66 for two years.
Doubts about utilisation of the workplace continued to hold down the office sector, which had a 12-month measure of -16. However, hopes of a vaccine rollout and more people returning to work pushed the two year measure to the positive, at 11.
Confidence remained negative for retail (-27 and -11) and CBD hotels (-40 for 12-24 months).
Industrial leads expectations for capital growth, of 3.1% over 12 months and 3.5% in two years’ time. Office values are expected to fall by 0.4% over the next year and then grow by 0.3% in two years, led by Queensland.
Values in the retail sector are tipped to drop 1.4% and 0.5% over the respective timeframes, and by 3.9% and 3.1% for CBD hotels.
Office vacancy rose to a survey high 9.8% nationally, rising in all states except Western Australia. It is expected remain at that level in 12 months, and at 8.8% in two years’ time, with above-average vacancy in all states bar WA.
The surge in demand for warehousing and logistics saw industrial vacancy fell to a survey low 4.6%. Shortages are most apparent in the eastern seaboard states, and that is expected to push up rents over the 12 months and two years, by 2.1% and 2.9%.
Rents are expected to fall most in Retail (by 3.0% and 2.2%), with negative returns across most of the country. Higher vacancies will force down office rents by 1.7% and 0.4%, with the outlook weakest in Victoria and New South Wales.
An above-average 86% of developers plan to start new works within the next 18 months, a jump from the 68% in the middle of 2020 that Oster said suggests the initial disruption to intentions caused by COVID has dissipated.
Developers appear to be swinging from residential to commercial building. The number of developers targeting residential developments is down to just 41%, the weakest result in five years, and well below the survey average of 53%.
Meanwhile, funding conditions continue to improve. The net number who said it was harder to obtain debt outweighed those who said it was easier, but improved to -16 from -19, for its best result since the end of 2015.
Equity funding conditions also improved, according to respondents, with the net number who said it was harder to obtain equity funding falling to a multi-year low -6.
Property professionals expect debt (-10) and equity (-3) funding conditions to improve further over the next three to six months, bringing them back to levels last seen in mid-2015.
Average pre-commitments to meet external debt funding requirements for new developments fell for both residential, to 62.3%, and commercial, to 57.2%.