May 14, 2015

NAB Quarterly Australian Commercial Property Survey – Q1 2015

Positive signs emerge as NAB’s Commercial Property Index climbs to a 4-year high with a notable pick up in confidence among property developers.

Positive signs emerge as NAB’s Commercial Property Index climbs to a 4-year high. But confidence continues to vary significantly across states and by market sector.  NSW and Victoria are by far the most optimistic states for commercial property and WA is the least optimistic by some margin. By sector, confidence is strongest in CBD hotels followed by industrial and weakest but improving in office. There was a notable pick up in confidence among property developers, with more than 1 in 2 planning to start new works in the short-term. Property firms now see consumer confidence as the biggest challenge facing their business, but the level of concern over stock availability, government regulation and red tape have all fallen.

The NAB Commercial Property Index rose to a 4-year high of +6 points (-2 in Q4’15) and sits comfortably above its long-term average (-5 points).

According to NAB Chief Economist Alan Oster: “The lift in sentiment was most notable in CBD hotels after a surprising fall in Q4, but also improved in office and industrial markets. Sentiment was a touch weaker in retail, but is still higher than the broader market average.”

There were, however, some notable differences across the states.

Positive sentiment in NSW and Victoria was offset by sharply weaker sentiment in WA and to a lesser extent in Queensland and SA/NT. Property professionals in NSW and Victoria were also the most confident looking forward, while those in WA are by far the most pessimistic.

By sector, confidence in CBD Hotels strengthened, with a lower AUD and strong demand from international visitors pushing up occupancy rates and adding to the more positive outlook.

Confidence in office markets also improved. While this suggests that a nascent recovery may be gaining momentum, it is being solely led by NSW and Victoria as weaker tenant demand associated with the mining slow down and over-supply continues to weigh on office markets in WA and Queensland.

In retail property markets, continued growth in retail trade turnover appears to be supporting confidence, with forward expectations also revised up.

“In contrast, expectations in industrial markets have weakened, mirroring a pullback in business confidence also seen in mining and manufacturing firms in our latest Quarterly Business Survey” said Mr Oster.

Expectations for capital growth over the next 1-2 years remain positive in all markets, with the best returns forecast for CBD hotels. Moderate growth in the office sector is being driven by NSW and Victoria, with capital returns expected to continue falling quite heavily in WA and in SA/NT.

Leasing market conditions remain difficult, with rents falling in all market sectors in Q1. The outlook for rental growth has also softened.

According to Mr Oster: “Positive income returns are forecast for retail and industrial property over the next 1-2 years, but expectations have softened since Q4. Office rents are also expected to continue falling as supply overhangs, especially in WA and Queensland, keep vacancy rates elevated.”

A key take out from the survey was the improvement in confidence among developers, where 58% said they were planning to start new works within the next 6 months.

“It appears a buoyant housing market is prompting more developers to divert resources towards residential property, with around 65% now looking to start new residential projects, the highest level since the survey began” said Mr Oster.

The survey now identifies consumer confidence as the biggest concern among property firms. However, fewer firms are worrying about stock availability, government regulation/red tape and financial and economic volatility.

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