NAB’s Commercial Property Index slips to a new low of -16 points in Q2’12 as fewer property professionals expect positive capital  or income returns. Retail and industrial market participants are very pessimistic, but expectations are also softer in office and CBD hotel markets. WA is the most optimistic state in nearly all sectors and Victoria is the most pessimistic, with expectations especially weak for retail and industrial property.

• Property professionals reported negative growth in average capital values for all property sectors in Q2’12. CBD hotels enjoy the strongest outlook (1.6% by Q2’13 and 3% by Q2’14). Office values are predicted to rise 1.1% and 2% in next 1-2 years respectively. Industrial values are expected to fall -0.9% over next year and rise 0.9% by June 2014. Retail values are expected to fall -1.2% in the next year and -0.2% in the next 2 years.
• Gross rents were also reported to be weaker in all markets in Q2’12 and expectations softer across the board. Office rents are expected to rise 1.4% over next year and 2.7% in next 2 years. Industrial rents are expected to stay flat over next year and rise 1.2% in 2 years. Retail rents are forecast to fall -1.5% over next year and -0.8% over the next 2 years.
• With rental expectations softening, leasing incentives continue to play a significant role in the retail leasing market. Incentives were also higher in office and industrial property leasing markets.
• Market supply in the national office and industrial property markets was assessed as “neutral” in Q2’12, but the retail market was “somewhat over-supplied”. Under-supply is expected to emerge in the office market in the next 3 years and in the industrial market in the next 5 years.
• Property professionals reported a kick up in vacancy rate expectations in all property segments in Q2’12. National vacancy rates are expected to decline in all markets over the next 2 years as supply tightens and overall market conditions improve.
• The development cycle may be turning. More developers are planning to commence new projects in the next 1-6 months and more developers are also chasing new acquisitions. Despite soft housing market conditions, the majority of property developers are still seeking to develop projects in the residential space.
• Access to debt and equity was seen as more difficult in Q2’12. Conditions are expected to improve in both channels over next 3-6 months but remain negative.
• Expectations on bank pre-commitment requirements have fallen slightly and are expected to continue easing in the next 12 months.
• Consumer confidence is still seen as the biggest challenge facing property firms. Economic and financial market volatility has again emerged as major concerns as confidence was likely eroded by recent turmoil in Greece and Spain. The extent of concern over interest rates is, however, falling rapidly.

For further analysis download the full report.

• Quarterly Australian Commercial Property Survey – June 2012 (191 kb)