Overview

• Recovery from the pandemic-driven recession is slowly filtering through into commercial property market sentiment. But while NAB’s Commercial Property Index (based on expectations for capital values and rents) lifted for the second straight quarter, it was still weak (-35 pts) and well below average (0 pts).
• Sentiment is diverging across sectors. Amid ongoing travel restrictions, it fell further for CBD Hotels (-64 pts), but lifted (although still in contractionary territory) for Retail (-58 pts) and Office (-41 pts). Industrial sentiment however rose sharply (+25 pts), supported by ever growing demand in online retail and continued requirements for available warehouse and logistics space.
• With expectations improving for a stronger near-term recovery in economic activity and a lower peak in unemployment, overall confidence levels in commercial property markets improved. The 12-month measure lifted to -23 pts and the 2 year measure to +2 pts, largely supported by the very favourable outlook for Industrial property. Confidence lifted in all other sectors, but is still at contractionary levels suggesting a full recovery may still be some way off.
• Overall sentiment lifted in all states in Q4, but was negative -ranging from -64 pts in VIC to -11 pts in QLD and WA. Market conditions are expected to remain negative in all states in the next 12 months except in WA (+8 pts), with VIC (-51 pts) the least confident. Longer-term confidence however turned positive in most states, except VIC (-16 pts) and NSW (-5 pts), with WA (+34 pts) highest.
• The outlook for capital growth for the next 1-2 years is for contraction in Office (-1.5% & -0.2%), Retail (-2.5% & -0.7%) and CBD Hotels (-1.8% &-0.8%), but at a slower rate than forecast in Q3. Industrial property expectations were however upgraded (1.9% & 3.0%), and raised (and positive) in all states.
• The national Office vacancy rate was unchanged at 9.0% in Q4. Higher vacancy in VIC (7.6%), NSW (7.4%) and SA/NT (9.8%), was offset by modest falls in QLD (11.5%) and WA (12.5%). Overall vacancy is expected to climb to 9.4% in the next 12 months and ease to 8.9% in 2 years’ time. Vacancy is expected to continue rising in NSW (8.5% & 9.1%), and stabilise or fall in all other states.
• The rental outlook across commercial markets is mixed. In the next 1-2 years, rents are set to fall most in Retail (-3.9% & -1.8%) and Office (-2.7% & -1.4%), with the outlook weakest in the Eastern seaboard states. The outlook for Industrial rents (1.4% & 2.1%) has however improved sharply.
• On the development front, an above average 54% of property developers plan to start new works in the short-term (next 6 months), up from 39% in Q3.
• The Q4 survey highlights a shift in emphasis among property developers planning to start new works from residential to commercial building. In Q4, a below average 43% of developers said they were targeting residential developments (53% in Q3), but more were planning to start new works in the Industrial (15%), Office (14%) and Retail (13%) sectors.
• Property professionals also pointed to a big improvement in the ease of acquiring debt and equity to run their businesses in Q4. They also expect debt (-4) and equity (-1) funding conditions to continue improving in the next 3-6 months, bringing them back to levels not seen since mid-2015.
• Property professionals said the average pre-commitment to meet external debt funding requirements for new developments in Australia fell to 63.3% for residential property, but increased to 60.6% for commercial in Q4.
• COVID has forced the adoption of new ways of working. In new research, the NAB survey found property professionals believe only 3 in 4 (77%) white collar workers will return to CBD offices post-COVID, and that firms will only require 80% of their existing CBD office foot print. They also expect the configuration of offices of the future to be split 68% working space and 32% communal space.

For further information, please see the NAB Commercial Property Survey (Q4 2020)