Brisbane’s industrial market prospects are growing despite the unevenness of business confidence

The State election has been resoundingly decided in the LNP’s  favour. The new Premier, the ex Lord Mayor of Brisbane, should inject confidence in the community and business in the competency of the Government. It has also created expectations in the real estate industry which may prove difficult to sustain.

The market has bottomed and possibly turned the corner, assisted by improved credit availability. In the past year most sale and purchase transactions were less than $3 million in value with a proportionately high number under $1 million. Vacant buildings comprised the greater majority of sales with investments and land running way behind. This will change as confidence grows.

Although there has been a low turnover and rents and yields softened, there has not been either a drastic drop in the rentals or a blow out in yields. The bank’s low release of distressed stock into the market is the result of the continuing relatively high differential between interest rates and yields, so only non earning assets have been released. This is a very different situation to the 1990’s when we saw a mass sell off, property prices dropping by up to 40% and interest rates exceeded yields.

Although banks seem a little more relaxed with their credit having increased their LVRs for some investments to 70% and decreasing their interest rate cover demands, purchasers seeking bank support still have to surmount a very high valuation hurdle. The RBA is presently holding the cash interest rate, but the cost for capital and the banks’ pursuit for profit will drive up interest rates over the coming few years.

The continuing reluctance of some major financial institutions 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, this lack of new supply will drive rental and property prices higher.

Land sales are few and this situation will prevail until bank policy changes. Though construction costs are stable, the long approval process and the high local government infrastructurel charges and rentals affordability issues continue, prices are not expected to fall further. When the existing stock is taken up, and this is not far off, and rental increases occur, land prices will begin to move upwards. The firming of yields will be last but this is a way off yet.

Leasing has been variable for some time but it has come back strongly. Leases are generally shorter but some good leases are coming through. The shorter term leases are a reflection of the lack of confidence in their businesses and the economy going forward or an expectation of better deals later. There is no obvious preference for standalone properties over strata. 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. Eventually it will become a seller’s market. Availability depends on location, style and size. In some locations and size ranges, tenant’s choice is already severely restricted. Property markets run in cycles and while the current one is off the bottom, it is timely to get involved.

Opportunities are there and will continue to be there during this languishing period of the market. For those who can afford to buy or lease do it soon. Prospective tenants may 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 flexible and structure leases to be shorter or receive earlier than usual market reviews and to ensure that annual reviews include uncapped CPI.

An unheralded development over the next few years is the likely implementation of a new accounting standard which will require businesses to recognize property and operating leases on balance sheets.Under existing standards, property leases are recorded by footnotes and operating lease not at all.

Bringing leases onto balance sheets could trigger debt covenants; when leases increase a business’s liabilities over and above levels agreed with lenders.

What could this mean to the property market? Obviously property leases may shorten and or businesses may elect to purchase rather than lease or, perhaps, other hybrid property arrangements may eventuate to circumvent possible debt covenant issues?

Phil Ainsworth,
Managing Director
April, 2012