Sentiment in the commercial property market weakened notably in Q2 2013. The recent softening in economic conditions (and more subdued outlook for GDP growth) seem to have weighed most heavily in office and industrial markets, with retail unchanged (but very weak) and improving for CBD hotels. Sentiment fell most in Victoria (now the weakest state after SA/NT). WA is the only state where sentiment was positive (but also lower). Expectations for capital and rental growth softened in all markets. Fewer developers planning to start new projects in the near-term, with capital sourcing intentions also suggesting developers are uncertain about the future operating environment. Consumer confidence still the main challenge facing property businesses, but concerns about government regulation and financial economic/volatility have also risen.

• NAB Commercial Property Index fell to -16 points in Q2 (below long-term series average of -6 points). Overall index weighed down by notable fall in office and industrial. With weaker domestic economic conditions, the outlook for capital and income growth more measured in all markets. As a result, NAB Commercial Property Index now expected to rise more sedately to just +13 points by Q2’14 and +30 points in Q2’15 (well below outcomes reported in the last survey).
• Sentiment fell heavily in Victoria in Q2 but SA/NT the most downbeat state. WA the only state reporting positive sentiment (but lower). Sentiment improved in Queensland and NSW but negative state index readings suggest these markets are also sluggish. Market sentiment to remain negative in SA/NT and Victoria in the next year. NSW the strongest market in the next 2 years, with Victoria overtaking WA as the next best.
• Capital values fell most for retail (-1.5%) in Q2, with values also down for industrial (-0.7%) and office (-0.5%) but up 0.3% for CBD hotels. CBD hotels to lead capital growth but pared back to 1.5% and 2.7% in the next 1-2 years. Property professionals also expect lower capital growth in both the office (0.9% and 2.5%) and industrial (0.5% and 1.6%) in the next 1-2 years. Average capital values for retail property tipped to fall -0.6% in next year and rise 0.3% in the next 2 years.
• Property professionals estimate gross rents fell in all markets in Q2 (at a faster rate than Q1). Rents fell most in retail (-2%). In the office and industrial markets, rents fell -1.2% and -0.9% respectively. Expectations for rental growth lowered in all markets. Office and retail rents now expected to fall -0.1% and -1.3% respectively in the next year, with industrial rents up a more modest 0.3%. In the next 2 years, rents expected to rise 1.2% in office, 1.1% in industrial and fall -0.3% in retail.
• Supply conditions in national office market softened in Q2, with the market now “somewhat over-supplied”. National retail market also “somewhat over-supplied”, but industrial and CBD hotel markets “neutral”. Vacancy rates fell slightly in industrial and retail markets in Q2 but increased in office. Vacancy rates forecast to rise in office and retail markets in the near-term.
• Fewer developers are planning to start new projects in the near-term, with the majority still seeking to develop residential projects although prospects improved most among retail developers. Debt and equity funding is still a problem for property developers, but conditions have been improving since late-2012. Developers’ capital sourcing intentions suggest growing uncertainty over the future operating environment. Consumer confidence remains the biggest challenge facing property businesses in the next 12 months, but concerns over government regulation and financial economic/volatility also higher.

For further analysis download the summary or full report.

• Q2 Commercial Property Survey – 2013 (PDF 346 KB)
• Q2 Commercial Property Survey Summary – 2013 (PDF 706 KB)