Market outlook

Downturn affects Australian commercial market

The credit crunch has seen growth slow in Australia’s retail and industrial markets, but the office market is still healthy – for now. Sean Murray, Head of Property Securities, Perpetual Investments, told a recent Adcorp Property luncheon, “things are moving along reasonably well, although [commercial property] is vulnerable if unemployment rises”. “It’s an opportunistic market,” added Murray. “When markets are down, it’s time to buy. There are acquisition opportunities at prices which are lower than two years ago.”

George Bouteris, Raine & Horne Commercial Sutherland Shire, said it was possible to buy a small factory unit for as little as $250,000 or pay $3-4 million for a free-standing factory in his region. “Leasing enquiries are also up, especially for factory units,” he said. On the flipside, leasing enquiries for commercial retail space had slowed, although there was demand for shop/residence properties.

Westpac’s recent Property Update supported these comments, stating declining yields may force commercial vendors to sell, “providing opportunity to cashed-up buyers”. Weakened investor sentiment resulted in lower retail yields, with vacancy rates falling in Canberra, Parramatta, St Kilda and East Melbourne. National vacancies rose to 4.2 per cent, from 3.9 per cent at the beginning of the year.

Lessors have been considering raising office rents to recoup some of their losses from softening yields, but tenants affected by the economic downturn are resisting. “[Commercial] rents increased in most markets as expected. Sydney CBD, although impacted most by the financial markets meltdown, should continue with low vacancy, as little is being built,” Westpac said.

Retail sales growth has continued to slow after falls in consumer confidence due to oil prices, stock market falls and higher mortgage repayments. The Westpac report predicts consumer confidence will improve in the second half of 2008, but sales turnover will only make a gradual recovery this year. “With the slower than expected spending growth, the risk increases on older secondary centres with regard to tenant retention at lease expiry in markets of higher supply,” Westpac said.

Demand for industrial premises has also weakened along with economic growth. The Westpac report forecast Australian states rich in resources, such as WA and the Northern Territory, would outperform other states, such as NSW and Victoria, in industrial property performance. “The declines in Melbourne in the first half of 2008 follow falls in 2007 as incentive levels rise, while falls in some Sydney markets reflect an increase in vacancy. Perth remains a stand-out, with growth of above five per cent.”

Angus Raine, CEO, Raine & Horne, said the economic downturn had slowed demand for commercial property, “but this also presented an opportunity for investors to buy at reduced prices”.

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