COMMERCIAL property market sentiment closed 2021 in positive territory for the first time in two years as lockdowns were lifted and vaccination targets reached, with gains in the office, hotels and retail sectors supporting the strong industrial sector.
NAB’s Commercial Property Survey for the December quarter still had industrial sentiment hovering at a near-record reading of 63 points (a reading of 0 is considered neutral), while office lifted by 15 points to -2, CBD hotels by 50 points to -25, and retail hit a three-year high at -20.
The overall NAB Commercial Property Index improved from -12 to 3.
Confidence has also grown across the market. The 12-month confidence measure rose to 13 and the two-year measure to 23. Industrial market confidence remains very high, with office back into positive territory (6 and 20 points over the two timeframes).
Short-term confidence in retail remains negative but gained some ground to -7, and the two-year measure moved into positive territory for the first time in four years. CBD hotels was also stronger as domestic and international travel restrictions lifted.
Overall market sentiment was higher in all states aside from Western Australia, which was the lowest of all states at -23. NSW was the only other negative state but lifted 25 to -2. Sentiment was highest in South Australia/Northern Territory, at 24, with Queensland at 19 and Victoria at 3, positive for the first time in over two years.
Short and long-term confidence levels are now positive in all states. Confidence in office markets improved in all states bar WA, retail confidence was higher in SA/NT, Victoria and NSW, but lower in Queensland and WA. Industrial confidence remains very high in all states.
Industrial leads expectations for capital growth over the next 12 months and two years (3.4% and 2.9% respectively), with Queensland and SA/NT the best prospects.
Office value prospects were revised up (0.7% and 1.1%), led by Queensland, with WA weakest and Victoria rebounding strongly in two years, and relatively modest growth in NSW. Retail values are tipped to grow modestly and CBD hotels to rebound in two years after a fall next year.
According to the survey, office vacancy rates rose to 9.9% but are expected to ease mildly to 9.8% and 9.2% in next one and two years, with lower – but above average – vacancy in all states. Retail vacancy returned to pre-pandemic levels (6.9%), but is still well above average.
Industrial vacancy fell to a survey low 3.8%, with markets tightest in NSW and SA/NT. It is expected to be unchanged in the next two years, with below survey average vacancy rates in all states except Victoria.
Office market rental growth is tipped to recover slowly in the next two years, at -0.6% over 12 months and growing 0.6% over two years, but NSW will under-perform.
Retail rents expected to keep falling, but at a slower rate, with WA and Victoria most sluggish. The outlook for industrial rents remains unchanged at 3.3% over next one to two years.
Developer rebound
An above average 55% of developers intend to commence new projects in next six months, up from 47%, with the spike likely reflects the emergence from long lockdowns in NSW and Victoria. Another 24% expect to kick off new projects in six to 12 months, down from 29%, with 88% in total planning to start works in the next 18 months. In the middle of 2020 this figure was at 68%.
There was a further decline in the number of developers planning to start new works in the residential space (down to 46%), and a large drop in the number looking at retail projects (9%), while there was an increase to 14% among those targeting industrial.
The higher number of developers planning to start new projects over the next six months pushed the number of developers planning to source more capital to fund their projects in this time from 25% to 30%.
These findings come as lenders stress test projects following the collapse of construction giant Probuild.
Commercial real estate financier MaxCap’s chief investment officer Bill McWilliams said in Australian Property Journal’s Talking Property podcast that the collapse has highlighted the risks of construction price escalations in the year ahead.
The average pre-commitment to meet external debt funding requirements for new developments increased for residential property to 60.0%, but was lower for commercial at 54.7%.
The net number of property professionals who expect debt funding to worsen over the next three to six months widened sharply to -24%, from -5%, but in terms of equity funding, an unchanged -8% expect conditions to worsen.
Over 370 property professionals participated in the survey,