FYI | Apr 30 2008
By Chris Shaw
Just as equity markets have been impacted in recent months by the turmoil in global credit markets, so too has sentiment fallen sharply in the property sector, not least because it was subprime loans in the US housing market that helped trigger the global crisis.
But according to ANZ Banking Group’s Australian Commerical Property Outlook report, the solid underlying fundamentals of the local economy will help limit any downturn in the Australian property market while also helping to offset the twin negatives of higher interest rates and increased risk aversion on the part of investors.
This is not to say there won’t be some impact, as the bank’s head of property and financial system research Paul Braddick expects a softening in income yields over the course of the year ranging from 0.25% for high quality assets to as much as 1.00% for secondary-quality properties, though he sees such a trend as short lived as confidence gradually returns to the sector.
Along with an improvement in confidence, Braddick expects healthy growth in rentals and this should be enough to offset the lower yields, while affordability is seen as likely to improve thanks to a measured increase in supply capacity, making any significant collapse in commercial property values unlikely.
This has been reflected by the performance of various asset classes in recent months, as while equities in particular have born the brunt of the fall in investor sentiment the Australian direct property market has been left largely unscathed according to Braddick.
Recent solid outcomes from bellweather sales in capital cities support the bank’s optimism, as these suggest last year’s sell-off in the listed property trust sector has not spread to the physical property market, as the issues in the former are more related to the adoption of new and more complex structures and the greater risks these structures entail, the report suggests.
Also supportive is the fact the yield compression experienced in property markets in recent years can be explained by shifts in the risk-free rate, meaning the market is not exhibiting any signs of being overvalued. As well the higher rental returns have helped offset the increases in borrowing costs, meaning while some adjustments in the market such as from stressed sales can be expected, they are unlikely to be significant, senior economist Ange Montalti says.
Looking at the sectors more closely the bank expects a lack of supply to keep office markets across Australia relatively stable this year, with only a risk aversion-related slight weakening in yields expected. A more diverse outcome is expected in the retail market, the bank taking the view those states exposed to the resources sector such as Queensland and WA should enjoy stronger conditions, while again a lack of any significant supply response should keep conditions relatively tight throughout the country.
The backdrop for industrial property is also supportive given the stable outlook for the Australian economy as a whole, the bank expecting rents to remain well supported even as new projects generate a modest increase in supply. The tourist accomodation sector should also hold up well in the bank’s view as while a slowing in global growth will likely limit visitor numbers from traditional sources such as Japan, the US and the UK, this will be offset by increased arrivals from emerging nations such as China, Vietnam and Russia. With room availability tight rates have increased in recent years and the bank sees scope for this to continue.
