Australia | Oct 21 2010
By Chris Shaw
National Australia Bank's quarterly Australian Commercial Property Survey showed some improvement in market conditions in the three months to the end of September, driven largely by gains in the Office and Hotels segments. This offset still negative conditions in the Retail and Industrial markets.
The bank's Commercial Property Index rose by 15 points to a plus 5 reading in the September quarter, up from a minus 10 point reading in the June quarter. While the pick up in the Office sector that supported the improvement was largely expected, the bank's chief economist Alan Oster notes the Hotels sector surprised via a better than expected room rate profile in the period. Confidence in the hotel sector has also improved.
In terms of expectations, Oster notes these remain strongest in the Office sector with a plus 17 reading. The Hotels sector is next at plus 13, while Retail and Industrial expectations are both significantly weaker at minus 4 and minus 10 respectively.
With respect to current conditions the Melbourne market is most confident across all sectors with the exception of Hotels as evidenced by a plus 28 reading, while conditions remain depressed in most markets in Brisbane. The overall reading for the Brisbane market was minus 27.
Looking ahead, Oster notes confidence for all property sectors is relatively positive, with further improvements expected over the next six to 12 months. Respondents to the survey expect the Office and Industrial markets to improve in either June or September of 2011, while expectations for a pick-up in Retail are split across 2011.
Major concerns for the property market over the next 12 months, according to NAB's survey, are interest rates and financing, while consumer confidence levels are also a growing concern. On the plus side the survey indicated availability of stock appears to be becoming less of an issue.
While interest rates remain the primary concern, Oster notes expectations for rates eased a little in the September survey. Respondents expect the cash rate will rise to 5.0% by September of next year, which compares to expectations in the June survey of rates at 5.5% by June of next year.
While conditions and expectations are improving, Oster notes new development plans continue to be pushed out, while sourcing debt is also becoming more challenging as debt market conditions remain tight.
Adding to funding constraints in the shorter-term are expectations of worsening pre-commitment requirements, while Oster notes rising interest rates are also seen as a significant challenge for property firms over the next year. The survey reflects this, with 57% of respondents reporting a go ahead on new developments in the next six months, down from 79% in the June survey.
Residential remains the favoured sector for new projects at 48% of the total of new developments planned in coming months. Office is also improving at 18% in September compared to 10% in June. Most new developments will use existing land-banked stock.
The September survey shows capital value and net rental expectations for the Office and Retail markets are largely unchanged on the June quarter results. This means expectations are for 3.1% capital value growth in the Office sector in the coming year, well above 0.9% for the Retail sector and 0.4% for the Industrial sector.
Estimates for Office market vacancies rose to 8.4% in the September quarter from 7.6% in June, with vacancies in Queensland rising to more than 10.5%. Retail vacancies improved however, falling to around 4.9% in the current survey from 5.6% in the June survey. Oster notes the market is expecting vacancies in both the Office and Industrial markets will trend lower over the coming year, while a sideways move is expected with respect to Retail vacancies.
The bank's survey gathers responses from real estate agents and managers, property developers, owners and investors, asset managers and valuers. There were 270 responses to the September survey, up from 248 in June.