Brisbane’s industrial market prospects are for slow growth in the short term with a much improved position in 3 to 5 years – despite the impact of flooding

by admin | 27th January 2011

While the Sydney/Melbourne centric media report more favourable commercial property marketing conditions, Queensland, including the southeast is less so because of its previous overdependence of commercial property credit obtained from low margin overseas borrowings through our regional banks and their subsequent withdrawal from the market.

There had been an increase of industrial sales last financial year but the average value per transaction was lower, with most transactions worth less than $3m and a high number under $1m in value. Vacant buildings comprised over 70% of sales, while investments were about 20%, with land making up the balance

The market obviously was favourable for cashed up buyers, with existing investments not under financial pressure. These buyers have been able to “bottom feed”, and with bank support can obtain good deals that will provide excellent growth into the future

The supply of properties was provided by over extended owners who, at the time of their loan rollovers, found the banks less willing then three years earlier to provide new loans. At rollover, they found themselves 10%, 20% to 30% down in their valuations with the banks insisting on loan to value ratios of around 60% instead of the heady 75% to 80% previously. Additionally, banks were insisting on much higher interest rate covers than previously. Thus property owners were faced with the bleak prospect of either providing additional security or selling part or whole of their portfolio. It is expected this situation will continue for at least the remainder of the year as the financial institutions reduce their loan portfolios in commercial property

Banks have increased their LVRs for some investments to 70%, a much sought after relief for stretched clients.  While the RBA is presently holding the cash interest rate, the demand for capital over the next few years will surely drive up interest rates due to inflationary pressure

The reluctance of banks to extend credit for commercial, particularly industrial, property development and investment purposes, will continue to hinder growth in the market as developers are unable to bring on new stock.  On the other hand, the lack of new supply will eventually drive rental and property prices higher

Land sales are few and this situation will prevail until bank policy changes. Although construction costs have declined, the long approval process, lower rentals related to affordability and less demand have depressed prices. However it is not expected for prices to fall further. When the take up of existing stock occurs, and this is not too far off, price increases will be first seen in rentals, initially through the reduction of incentives, and then face rentals. The firming of yields will be last and this will be some time away

Leasing has seen a variable year. While there has been a slight increase in activity, this has been in shorter term leases, a reflection of lack of confidence in their businesses and the economy going forward or an expectation of better deals later. Over 50% of leasing transactions were for standalone properties with 45 % strata and the balance land

Meanwhile, the leasing market remains challenging. Discretionary decisions are being delayed. Although the stock of vacant buildings is steady, the lack of demand ensures it is a tenant’s market. Availability depends on location, style and size. Larger buildings still take longer to lease. Incentives such as rent free periods, fit outs and favourable review clauses are being negotiated from cash needy landlords. However, this situation will come to an end when confidence returns to the market, and the lack of new stock will quickly drive prices upward

Property markets run in cycles and while the current one has just lifted off the bottom, it is not too late to get involved. Opportunities are there and will continue to be there during 2011 for those who can afford to buy or lease

Sales activity has been greatest under the $3m mark and it is over this price tag where the best buying will occur this financial year. If you are able, purchase as early as possible before demand increases and forces prices higher

Prospective tenants may also take advantage of lower rentals and negotiate concessions with rental review clauses to safeguard against future inflation. On the other hand, landlords need to be flexible and structure leases to receive earlier than usual market reviews and to ensure that annual reviews include uncapped CPI

Contrary to many, reports of an increase in short term leasing transactions due to flooding has not occurred because tenants and landlords have worked together to get those affected operational as early as possible.  This co-operation and flexibility has been possible because warehouses can be readily cleaned and refurbished; on the other hand office space will take much longer.  While there may be some give and take to make this work, rentals will remain around their already relatively low rate.  Sales will recover in the effected areas within 6 – 12 months

Looking into the longer term, most of Brisbane’s commercial and industrial buildings are either near the river or on flat land, all subject to local flooding, the degree of flooding a matter of the circumstances at the time.  Additionally these areas are connected by communication corridors which are also subject to inundation.  As there is a limit to what flood mitigation can achieve, future flooding in Brisbane may be expected.  Planners, architects and engineers need to better flood proof premises by ensuring services, such as power and communications are lifted above flood levels.

Phil Ainsworth

Managing Director
January 2011

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