Forecast for 2008 Commercial Property Market: Expect a Dip, Then Gains
The sky is not falling in, experts agree, despite a faltering US economy, but the performance of the local investment market may be patchy until the second half of the year, with another surge expected in the fourth quarter.
“It’d be silly to think every country around the world wouldn’t be influenced by issues in the United States economy at present,” said Macquarie Bank director, property investment banking, Guy Nelson. “It’s the biggest economy in the world, and so any downturn will have a ripple effect in Australia.”
“It’s all a question of degree though”.
Mr Nelson said recent share market volatility, which came after a strong surge in LPT values last year, may have injected a “dose of reality” into Australia’s overheated property market.”
“The LPT sector has been hammered on the back of Centro wobbles…but those businesses that are conservatively geared are still chugging away.”
“It might be the case institutions don’t chase things as aggressively as they did, and start asking ‘do we really want to pay that price,’” he said. “But I still think the fundamentals are sound in Australian property markets.”
Knight Frank managing director Victoria Paul Burns agreed investors have overreacted to the Centro fallout, and a slowing down of the US economy.
“I don’t think Australian commercial property markets are immune to international events, it clearly has an impact, but not a direct impact” said Mr Burns.
“From a Melbourne point of view, we don’t have an enormous amount to be as concerned about as some others do,” he said. “Our domestic economy is still bubbling, tenant demand is strong, we’re manufacturing and warehousing more, and recording net increases in population which helps the retail sectors.”
Mr Burns said he doesn’t anticipate a problem finding buyers for properties in Melbourne’s “still undervalued” market. He said Melbourne, like Sydney, still has a lot to benefit from the resources boom which is continuing on its upward spiral.
“Investors understand that potential for growth exists on the basis of overflow from the resources states,” he said. “Companies cannot afford to do business in Perth or Brisbane and people cannot afford to live there.”
“Consequently, any employer that has the option of being located in Victoria may do so and this is a key contributor in our growth,” he said.
Property Council of Australia stock and vacancy figures being released today are expected to show vacancy in the Melbourne CBD to have fallen from its July 2007 rate of 5.9 per cent, to around 4.4 per cent.
Colliers International state chief executive John Marasco agreed Melbourne’s key property sectors are performing strongly, and isn’t expecting any fire sales.
“Most of the groups who purchased investment grade property are gravitated toward retaining them as long term income producing assets,” said Mr Marasco. “They factor in an element of risk (in the form of rising interest rates, falling rents) at the time they formulate an offer.”
Mr Marasco said he expects more investors to return to the LPT sector by the middle of the year.
“Some trusts represent returns of more than 10 per cent, which you can’t get from direct real estate,” he said. “And companies like Valad and Charter Hall that have strong leadership, and a good stable of property, will be seen again as smart buying.”
Mr Marasco anticipates total investment sales in 2008 to match 2007, when a record $4.9 billion in commercial property was transacted.
Almost half that amount of property sold in the last quarter of 2007, according to industry research.
“I think it will be a strong year for investment sales, again with a lot of activity in the last quarter,” he said. “I’m not expecting anything spectacular in the first half.”
According to research by Knight Frank, the amount of commercial property assets worth more than $2 million in 2007 surpassed the $4.2 billion transacted in 2006.
Knight frank says Wholesale Property Funds were the major buyer of retail and office stock, purchasing $1.125 billion (39.81 per cent) of retail stock, and $719 million (44.8 per cent) of office stock.
Developers were the most prevalent buyer type of industrial property in Melbourne with major institutions continuing to land banking sites, particularly in the west.
Jones Lang LaSalle research manager Andrew Ballantyne said there was 335,000 square metres of industrial space completed in 2007 in the western market, of which just 38,000 square metres is vacant.
“Looking into 2008, there is 147,000 square metres of projects under construction and scheduled for completion, with a further 79,000 square metres in planning,” said Mr Ballantyne. “At the moment total supply in 2008 is predicted at 226,000 square metres which, on 2007 results, would barely meet market demand.
