With adversity comes great opportunity. It is important to remember this as we head into a new financial year.
The past 12 months have seen our property sector defined by the two-speed nature of the Australian economy, and this will continue to present challenges in the year ahead.
The gap between the mining states of Queensland and Western Australia and the rest is not likely to shrink any time soon.
Notwithstanding the disparity between the regions, the growth from the mining and resources sector will continue to stimulate the broader Australian economy, as evidenced by our national unemployment rate of 5.1 percent.
Similarly, global economic conditions will continue to fluctuate. A spin-off from this international instability, however, is that Australia’s economic performance is comparatively strong, which should drive continued investment in our property market from overseas.
Offshore investors have committed circa $3.7 billion in Australian property markets in just the past six months, and local investors are also becoming more active, with pension funds looking to increase their allocations to commercial property.
Investors will remain cautious, with forecasts suggesting the weight of capital chasing quality assets will lead to a further tightening of Premium and A Grade yields by as much as 0.25 percent in the next six months. The secondary grade market is expected to continue to experience a softening of yields in the months ahead, as investors’ appetite for risk remains soft and owners place more assets on the market as funding pressures increase.
Despite this, opportunistic buyers will continue to target underperforming assets in order to reposition and take advantage of the potential future upside.
Foreign investment from sovereign wealth funds, pension funds and REITS, particularly from Asia, is forecast to remain high as investors chase secure yields of between 6.5 percent and 7.5 percent in Sydney, compared with 4 percent to 6 percent returns in Hong Kong, Singapore, London or New York.
For the first half of the new financial year, we expect an increasing battle for core and core plus assets across all asset classes.
Office markets across the board are performing relatively well, however the current weakness in the finance and insurance sector will continue to impact upon the performance of Sydney’s office leasing markets. As a result, below average absorption levels are expected to continue into the first half of 2013.
A shot in the arm for the Sydney market is the recent pre-commitment of more than 120,000 sqm of space at the anticipated $6 billion Barangaroo redevelopment to anchor tenants Westpac, KPMG and Lend Lease. This announcement will stimulate activity throughout the Sydney CBD and do wonders for the market.
In the wider retail sphere, the going is tough. While household spending has been rising, expenditure in the traditional retail sector has been lagging other areas of consumption.
With continued short-term pressure on the sustainability of occupancy costs, property owners will be focusing on tenancy mix and maintaining occupancy levels in their shopping centres, with growth in specialty rents limited. The stability of retail property, however, remains an attractive proposition for many investors as they look beyond the current challenges being experienced in the broader retail sector.
The other well-documented concern for the retail sector is the rise of online shopping and, while this presents an ongoing challenge for the sector overall, it also has repercussions for other property sectors, particularly industrial.
Global growth in container imports has driven logistics activities to the forefront of industrial real estate over the past decade and this will continue in the year ahead.
The next 12 months are likely to see the Australian industrial market going through a phase of steady improvement, with signs of continuing strong leasing and investor demand for quality industrial space. A lack of available land and built product will continue to impact key industrial markets.
Lending requirements for developers seeking to construct new residential projects will remain constrained, as they have since the GFC, resulting in declining new supply levels since 2009. These factors have translated into tight vacancy rates, rising weekly rents for investment stock and stable median prices within Australia’s residential property market.
However, the Australian residential market continues to perform strongly when compared to major global markets, and we believe persistent demand for residential dwellings will continue unabated due to positive net overseas migration levels and natural increase coupled with declining supply levels.
After a quiet start to the year, Australian hotel sales activity picked up markedly during the second quarter of 2012. There were a number of large sales completed, and there remain others close to being finalised.
Hotel sales for the 2011/12 financial year totalled just over $1.4 billion, showing an increase of 22.7 percent compared with the $1.15 billion transacted in 2010/11. Activity in the sector is being led by major hotel consolidations to offshore investors, with Asian purchasers in particular keen to enter the Australian market.
More than 90 percent of sales so far this year have been to buyers from Asia, with purchasers from Singapore and Malaysia dominating activity. These investors are looking to secure both property assets and management rights, with domestic owners’ net sellers of hotel property.
While there has been an increase in the number of sales, transactions of hotels are, on average, taking longer to settle.
Investment activity is being led by the Sydney, Perth and Brisbane markets, where sales volumes are well above long-term average levels.
Offshore investors see value in Australian assets and view the market, particularly those assets with exposure to business travellers, as safe, long-term investments.
John Marasco is managing director of investment services at Colliers International.