STILL TOO EARLY TO BREAK OUT THE CHAMPAGNE! – MARKET COMMENTARY JULY 2014

by admin-king | 22nd July 2014

The May Federal Government Budget has not been broadly well received, no doubt because any prescribed medicine, good or bad, is not good news. The budgetary measures will hurt many people. This is reflected in lower consumer sentiment and confidence generally. Nonetheless, continuing low interest rates are supporting demand and growth without threatening the RBA’s inflation target of between 2% and 3%. The economy is growing at its fastest pace in two years on the back of a surge in mining exports, while the Australian dollar continues to trade above 92 cents to the US dollar. 

The Queensland Government followed up with a benign state Budget that projected only moderately increased revenue from real-estate sales and state government–asset sales, if they eventuate after the next election.

Thus our last market commentary forecasting a slowly growing economy with continuing low interest rates awaiting the next economic drivers—construction and the housing market—to kick-in, is still valid. Additionally, those businesses affected by the high Australian dollar will continue to struggle.

A broadening of investment after mining will take time—well into the midterm. While there is uncertainty in Europe, there are signs of growth in the US and our dollar remains high, so interest rates are expected to remain stable for some time—perhaps twelve months.

Given these conditions, the commercial/industrial property market might remain subdued until the new economic drivers kick in. Industry reports show a steady level of transactions across the price spectrum. When suitable larger value stock has been available, it has been purchased by cashed-up property funds. Pricing is presently stable with yields between 7.5% and 9%. Investor focus is rental growth and the assurance of future rental.

Purchasers are in the market, but activity is generally restricted by the absence of suitable stock. However, the improvement in credit availability and low interest rates have ensured sales are occurring. Vacant buildings comprise many sales with investments most affected by stock shortage. When was the last time one saw such a huge difference between interest rates and yields? The number of land sales in selected areas is increasing due to reasonable repricing by vendors.

Banks are more relaxed with their credit, but 65% to 70% LVRs remain the norm. While the RBA has kept the cash interest rate low, any rise in the longer-term rates will indicate the future direction and when to lock-in. Inevitably, the demand for and cost of capital in the future will eventually drive up interest rates.

The reluctance of banks to extend credit to developers will continue to hinder growth in the market as they are unable to bring on new stock. On the other hand, the lack of supply will drive rental and property prices higher. The lack of supply is being addressed, in part by a pipeline of some 444 000 m2 of industrial space expected to be completed this financial year in the greater Brisbane area. Included in this is an estimated 124 000 m2 of space in the Australia TradeCoast.

Leasing has been variable for some time. While leases have been generally shorter, longer leases are beginning to emerge. The shorter-term leases are due either to a lack of confidence of lessees in their businesses/industry or the economy going forward and an expectation of better deals later. There is no obvious preference for stand-alone properties over strata in lower-priced properties. If it is possible, discretionary decisions are still being delayed.

The stock of vacant buildings for lease and sale is steadily decreasing. The higher demand and little stock entering the market are beginning to drive rentals higher. It will become a seller’s market. Availability depends on location, style and size. In some locations and size ranges, a tenant’s choice is already severely restricted.

Property markets run in cycles and while the current cycle is off the bottom, it is timely to get involved. Although difficult to find, opportunities are present in this market. For those who can afford to buy or lease, do it soon: just keep reminding yourself of the huge differential between the long-term interest rates and the yield ranges, and do not forget the value of depreciation.

Sales activity has been greatest under the $5 million mark, many of which are strata titled. It is over this price tag where the best buying occurs. If you are capable, purchase as early as possible before demand increases and forces prices higher.

Some pundits see the Brisbane industrial market eclipsing Melbourne’s in the early 2020s. This hypothesis is based on the high 15% annual growth experienced by the Brisbane market over the past decade or so. Sydney’s growth rates, by far the largest, and Melbourne’s over the same period, were 9%. This suggests that property managers might need to reweigh their portfolios in the not-too-distant future.

Prospective tenants might also take advantage of relatively lower rentals and negotiate concessions with rental-review clauses to safeguard against future inflation. On the other hand, landlords need to be increasingly flexible and structure leases to achieve the benefits of increased pricing in the near future.

Purchasers and tenants should take advantage of the existing conditions and cash in for the future.

Phil Ainsworth,
July 2014

 

 

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