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As we progress into 2017, prospects for commercial property investment appear to be mixed, with sectors such as offices, hotels and retirement living showing promise but others appearing to offer less hope.

Looking at the broader economy, Dexus Property Group talked in a recent report about an investment climate in which the range of potential outcomes was wider than usual and where upside and downside risks were ‘finely balanced.’

Upside risks include the US economy strengthening more quickly than expected, Chinese growth being sustained, Australia benefiting from a resurgence in Asian middle class consumption and the Queensland economy improving more quickly than expected, Dexus said.

Downside risks include a sharper than expected contraction in house prices, a slowdown in China, a trade war in the Asia Pacific and geopolitical crisis in Asia or Europe.

In its baseline assumptions, Dexus says it expects the US recovery to strengthen through to 2019 and for China to maintain its current growth profile. Locally, Dexus says the economy will grow slowly despite an improvement in export earnings amid slowing resource and dwelling investment. Employment growth, Dexus says, will ease from a high base. Although retail spending will be constrained, Dexus says service sector activity will remain a growth driver for the economy.

Others offer different perspectives. The OECD, for example, expects the employment market to remain strong with unemployment dropping from 5.7 per cent to 5.3 per cent over the next two years. Whilst the economy will grow by a sluggish 2.6 per cent in 2017, this will lift to 3.1 per cent in 2018 as the decline in resource investment tails off and the non-resource sector is supported by rising consumption and investment stemming from the aforementioned improvement in the labour market, the organisation says.

In terms of property, sentiment levels are healthy. Participants in the most recent edition of the Property Industry Confidence Survey conducted by the Property Council of Australia in conjunction with the National Australia Bank expressed optimism for the outlook over the next 12 months, with confidence levels remaining healthy in the hotel and retirement living sectors and improving in the retail, office, retail and industrial sectors.

Market fundamentals are mixed, and are painting a subdued picture in some areas but greater promise in others (see below).

Below is a snapshot of the outlook according to commentators for each sector:

Offices

As recent low levels of development activity feed through into a dearth of new supply, opportunities can be found in the office sector as continuing strength in demand drives a supply/demand imbalance. Whereas around 600,000 square metres worth of space is set to be absorbed over the next three years, CBRE reckons only around 250,000 square metres of additions is in the works. In the most recent edition of its Office Market Report, the Property Council said demand in Brisbane and Melbourne was running at several times historic norms.

Not surprisingly, the best opportunities centre around Sydney and Melbourne, where Dexus says recent strong levels of rental growth are expected to continue over the short to medium term amid robust fundamentals and strong state economies.

CBRE agrees. In Sydney, CBRE reckons prime net effective rents will shoot up from around $700 per square metre in 2016 to almost $900 per square metre in 2018 as vacancy rates plummet to close to three per cent. In Melbourne, net prime effective rents will rise from just over $500 per square metre now to almost $600 per square metre by 2019.

Elsewhere, markets in Brisbane and Perth are set to stabilise as sky-high vacancy levels ease back as recovering demand coincides with a dearth of new supply additions.

Hotels

With 13 of Australia’s top 20 sub-markets experiencing record volumes of international visitors in 2015/16, the hotel sector is another area of activity.

The market seems to be on a long-term growth trajectory: recent forecasts from Tourism Research Australia suggest that accommodation visitor nights will grow from 275 million in 2016 to more than 400 million by 2024/25.

Particularly strong markets are Sydney, Melbourne and Cairns, which according to Colliers each have occupancy levels which are north of 80 per cent. Whilst Perth, Brisbane and Darwin will have to absorb considerable levels of incoming supply, Colliers said Sydney and Melbourne will continue to perform extremely well over coming years.

Industrial

The situation is less buoyant in industrial, where Dexus expects rental growth to remain subdued amid a competitive pre-commitment market and a greater than average supply in 2017. Owners of older stock face growing risks associated with retention of tenants, Dexus says. The best investment strategy, it says, revolves around targeting markets with limited land availability, particularly in Sydney and Melbourne.

According to CBRE, one of the hottest markets is inner Sydney, which unlike Outer West Sydney has limited space and where net rents have risen by 7.7 per cent in a year.

Retail

Courtesy of sales growth rates across many categories being below long-term averages, CBRE says any massive levels of momentum with regard to rental growth are long behind us notwithstanding continued demand from international retailers. The organisation adds that most capital cities are experiencing negligible if any rates of growth whilst rents in Perth and Adelaide are falling.

Going forward, CBRE says CBD rent growth is expected to continue to slow in 2017 as retailers continue to experience challenging conditions. Dexus agrees, saying that retail sales growth will continue to face headwinds amid subdued levels of consumer confidence.

 
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