The overall Index continues to be weighed down by negative sentiment in Retail and Office markets amid elevated economic uncertainty and slowing spending. A well below average 1 in 3 property developers plan to start new building works in the next 6 months, and more property professionals said funding conditions (both debt and equity) were harder in Q1.

Survey highlights

• The NAB Commercial Property Index improved a little further in Q1 2023 but still printed negative (-6 pts). Though the index was up from -9 pts in Q4’22, it was well down from the same period last year (+11 pts) and still trending below the long-term survey average (-1 pt).
• Sentiment was unchanged and highest in the CBD Hotels sector (+33 pts), with property professionals reporting positive capital and RevPAR growth during the quarter. The Industrial Property index fell to its lowest level in over 2 years (+32 pts), but remains well above the survey average (+9 pts). Office market sentiment is still very weak, but improved to -16 pts (-27 pts in Q4’22), with the Retail index also up a little but still deeply negative (-32 pts from -37 pts in Q4’22), amid elevated economic uncertainty and slowing spending.
• Economic uncertainty remains elevated. How quickly inflation moderates is a key unknown as domestic pressures – including wage and rents growth – continue to build. On the other hand, the full impact of the rapid tightening in monetary policy is yet to be seen, and there is a risk that activity could slow more sharply than expected. Against this backdrop, commercial property confidence levels for the next 12 months continued to print negative (-2 pts), with the 2-year measure unchanged at a well below average +12 pts.
• Confidence in the next 12 months is highest for CBD Hotels (+33 pts) and Industrial property (+32 pts), though down from +42 pts and +46 pts in Q4’22 respectively. Confidence remains relatively weak for Office property (-11 pts & +3 pts), and still lowest overall for Retail property (-23 pts & -7 pts) – though somewhat higher than in the previous quarter (-38 pts & -14 pts).
• Commercial property market sentiment was negative in all states bar SA/NT where the state index rose to +3 pts (0 pts in Q4’22). It remained lowest in VIC by a very large margin but did ease somewhat to -28 pts (-37 pts in Q4’22). Sentiment fell in all other states, with the biggest fall in WA (down 16 pts to -2 pts). Confidence levels for the next 12 months are strongest in SA (+15 pts) and WA (+11 pts), and lowest in VIC (-30 pts) and also negative in NSW (-6 pts).
• Capital growth expectations for the next 1-2 years are highest for CBD Hotels in Q1 (0.6% & 1.8%), with Industrial values also expected to grow (0.4% & 1.0%) – though shaved from the previous quarter (1.2% & 1.7%). Expectations for Office property also cut (-2.5% & -1.3%), and weakest in VIC (-6.4% & -4.7%) and NSW (-3.2% & -2.0%). Retail expectations a little better but still deeply negative (-2.5% & -1.4%), with values to fall in all states next year, led by NSW (-4.0%) and VIC (-3.0%).
• National Office vacancy rose to 9.9% in Q1 (9.5% in Q4’22), and continues trending above average (8.5%). Vacancy now expected to ease more slowly to 9.6% & 9.1% in the next 1-2 years (9.1% & 8.3% previously). Despite this, Office rents are now expected to grow 0.4% & 0.9% in the next 1-2 years (-0.8% & -0.2% in Q4’22), and in all states bar VIC (-1.2% & -0.8%). The outlook for Retail rents is still negative, but the pace of decline is expected to slow to -1.0% & -0.6% (-1.8% & -0.9% in Q4’22). Industrial rents expected to remain very buoyant (3.2% & 2.8%), and grow in all states led by NSW (3.5% & 3.2%), QLD (3.4% & 2.7%) and VIC (3.2% & 3.6%).
• Amid a broader slow-down in new construction and building approvals data, the number of property developers planning to start new works in the next 6 months was unchanged at a 3½ year low 33%, and continues to sit well below the survey average (48%). Only 37% of now also intend to commence new building works in the next 6-18 months, down from 42% in the previous quarter.
• With an apparent stabilisation in house prices, and very strong pickup in housing demand as population growth rebounded since the reopening of international borders, Q1 saw a further up-tick in the number of developers planning to start new building works in the residential sector to 51%. However, below average numbers plan to start new works in the Office (12%) and Industrial sectors (14%) – despite expectations for ongoing shortages of Industrial space. The number planning to start new works in the Retail sector however improved to 10% after dipping to a near survey low 6% in Q4’22, but is still trending below the survey average (13%).
• Funding conditions remain difficult. The net number of property professionals who said it was harder to obtain borrowing or loans (debt) rose for the fourth straight quarter to a 4-year high -37% (-36% in Q4’22 and -20% in Q1’22). Equity funding conditions were also more difficult, with the number who said it was harder to obtain equity climbing (quite sharply) for the fifth consecutive quarter to a survey high -39% (-27% in Q4’22 and -9% at the same time last year). Looking ahead, more property professionals believe debt funding conditions in the next 3-6 months will be worse than now (-39%), but the net number expecting equity funding conditions to be worse is lower (-25%).

For further information, please see the NAB Commercial Property Survey (Q1 2023)