NAB Quarterly Australian Commercial Property Survey Q1 2016

Sentiment in Australian commercial property markets softened a little, but remains well above long-term average levels. Despite some pull back, CBD hotels and office markets continue leading the way, with NSW still at the forefront by state and WA floundering.

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Accessing credit is becoming harder for property developers, with debt and equity funding conditions again worsening and pre-commitment hurdles for new developments also rising further.

The NAB Commercial Property Index fell to +12 points in Q1’16 (+17 in Q4), but remains above its long-term average (-4).

By sector, all markets are tracking above long-term average levels, except CBD Hotels, but it continues to out-perform the broader market.

According to NAB Chief Economist Alan Oster: “Property professionals in the CBD hotels sector are also the most confident in the next year, followed by office and retail. However, confidence levels are broadly similar across all market sector participants in 2 years’ time”.

By state, sentiment improved in NSW and it continues to lead the country by some margin, led by a strong contribution from the Office sector. Sentiment also improved a little in WA, but remains deeply negative and by far the worst performing state, dragged down by chronically under-performing Office and Industrial property markets. Sentiment was lower in all other states.

“Property professionals in NSW are the most optimistic in the next 2 years, but those in Victoria are expecting the biggest improvement. WA remains the most pessimistic state, but only just ahead of SA/NT”, said Mr Oster.

On average, capital values are expected to increase most for CBD hotels in the next 1-2 years (1.4% & 3.4%). Office (1.1% & 1.3%) is next best, with strong returns in NSW and Victoria offsetting falls in WA and SA/NT. Retail capital values are also expected to grow (1% & 1.3%), led by NSW, Queensland and WA, with returns for industrial property (0.4% & 0.8%) held back by big falls in WA & SA/NT.

In leasing markets, office rents are expected to grow 1.1% & 1.5% in the next 1-2 years, led by solid returns in NSW and to a lesser extent Victoria. In contrast, rents in WA are predicted to continue falling heavily amid elevated vacancy approaching 15% in the next 1-2 years, and to a lesser extent in QLD where vacancy rates are tipped to remain at around 11%.
In the national industrial market, the outlook for rents improved (0.5% & 0.9%), but expectations for retail property were pared back a little (-0.1% & 0.4%).

On the development side, fewer property developers are looking to enter the market in the near term – around 50% plan to start new works in the next 6 months, down from 52% in Q4 and 58% a year ago.

“Significantly, for developers intending to start new projects, a survey low 38% indicated they were targeting residential developments, down from 54% in Q4, presumably reflecting the over build in apartment markets” said Mr Oster.
The survey also shows that funding issues may have had an adverse impact on their development plans.

More developers said their debt and equity funding situation had worsened over the quarter, while the average pre-commitment requirement to get projects up and running rose for the fourth straight quarter to 54%.

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