NAB Quarterly Australian Commercial Property Survey Q4 2015

Despite an overall improvement in commercial property market sentiment, the survey reveals that fewer developers are planning to start new works in the short-term.

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Sentiment in the Australian commercial property market hit a new high in Q4, but the headline index continues to mask big differences across property sectors and states.

By sector, CBD hotels and office markets are leading the way. NSW and Victoria are also out-performing, but WA is lagging considerably. Property professionals noted a deterioration in their funding conditions on both debt and equity fronts in Q4, with tighter credit conditions also being reflected in higher pre-commitment hurdles for new developments.

The NAB Commercial Property Index rose to a new survey high +17 points in Q4 (+10 in Q3).

The improvement in the overall index was led by CBD hotels, followed by office and retail. Sentiment in industrial property markets fell and is now weakest overall.

Looking ahead, property professionals operating in CBD hotel markets are most confident, which may reflect a shortage of supply and the broader pick up in tourism on the back of the lower AUD, along with a pick-up in business travel.

Confidence is lowest (albeit positive) among retail property operators, perhaps reflecting expectations that the impetus to household consumption from the housing market will wane through 2016 as house price growth slows.

The headline Commercial Property Index also continues to hide some very big differences in performance by state.

According to NAB Group Chief Economist Alan Oster: “NSW and Victoria remain at the forefront of the improvement in market sentiment, with WA still wallowing in deeply negative territory.”
NSW continues to be the most optimistic state for commercial property in the next 2 years, with Queensland tipped to be the big improver and WA the most pessimistic.

Survey respondents believe that CBD hotels will provide the best capital returns in the next 1-2 years (4% in each year), followed by office (1% & 1.2%), with significantly higher returns in NSW and Victoria masking further big corrections in WA. Capital returns are expected to be lowest for retail property (0.4% & 0.6%).

In leasing markets, office property is expected to provide the best returns over the next 1-2 years (0.7% & 1.7%), with rental growth in NSW and Victoria leading the
way. In contrast, office rents in WA are expected to continue falling heavily amid elevated and climbing vacancy rates, significant over-supply and weak tenant demand.

In the national industrial market, the outlook for rents has been pared back a little (0.2% & 0.4%) with rental returns for retail property also softer (0.2% & 0.5%).

Despite an overall improvement in commercial property market sentiment, the survey reveals that fewer developers are planning to start new works in the short-term.
“Funding issues may be playing a role here, with more developers indicating that their debt and equity funding situations had deteriorated” said Mr Oster.

Tighter credit conditions are also being reflected in higher pre-commitment hurdles for new developments – up for the third consecutive quarter to 53.5% in Q4 and expected to tighten further over the next 6-12 months.

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