Brisbane’s industrial market prospects are for slow growth in the short term with a much improved position in 2 to 3 years

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 creditobtained from low margin overseas borrowings through our regional banks and their subsequent withdrawal from the market.

There was an increase of industrial sales last financial year but the average value per transaction was lower with mosttransactions worth less than $3m and a high number being less than $1m in value. Vacant buildings comprised of 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.

A recent report is that one of the major banks is considering ncreasing its LVR for investments to 70%. If this occurs much sought after relief will be provided to ‘stretched’ clients. If one bank moves in this direction it is likely the others will soon follow. While the RBA has recently held the cash interest rate at 4.5%, the demand for capital over the next few years will surely drive up interest rates due to inflationary pressure.  Some banks are currently advising investors to lock in their interest rates.

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 new stock onto the market. 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 2010/2011 financial year 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 in  2011 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 receiveearlier than usual market reviews and to ensure that annual reviews include uncapped CPI.

After 15 years, our usual graphs including the moving annual totals by value and number for industrial sales in  Brisbane can no longer be provided. In its wisdom, the Titles Office has removed zoning categories so that vacant industrial land and strata titles improved sales cannot be aggregated, this came into effect mid 2009. All that can be aggregated are improved sales, north and south of the Brisbane River.

The new data release strategy by the Government deprives the industry and public of vital historic statistical information. One can only wonder why this has occurred without consultation and whether it has been instituted purely for money making purposes. It is hoped the relevant institutions and organisations make joint representation to have this decision speedily reversed.

- Phil Ainsworth, September 2010