Brisbane Industrial Real Estate Market Review – Spring 2012

Brisbane Industrial Market Review - Spring 2012
Given Australia’s economic background, the recent State budget was in line with other governments and predictably focussed on fiscal responsibility, i.e. cutting spending and investment. In relation to the property market, and despite the lobbying of the Property Council of Australia Queensland, land taxes and stamp duties remain unchanged, spending in infrastructure restrained and only promises minor changes to the Planning Act…the industry has little to crow about. That said, the residential building sector may receive a boost with the $7,000 payment to first home buyers being revamped by being increased to  $14,000, but only to first home buyers of new homes with no stamp duty on those under $500,000.

The Australian economy is growing soundly, driven by the mining and resource sector, with declines in prices cancelling or deferring less profitable investments/projects. Industries affected by the high dollar, e.g. tourism, are doing poorly while most others remain weak, which explains, generally, the low business confidence. A broadening of investment after mining, probably into the construction and property markets, will become the next driver for the economy but this will take time – well into the decade. Inflation remains subdued but if the uncertainty in Europe and the slow growth of the US continue, interest rates may be cut should the economy become too soft.

More specifically, the commercial/industrial property market may see more of the same for sometime until the new economic driver grows sufficiently to act as a ‘circuit breaker’. Thus the market continues to scrape along the bottom. Some industry reports have indicated a steady level of transactions around $15 million and above, but these  have been mostly in Sydney and Melbourne, and in the office market. There have been few large industrial sales and those which have occurred were from sellers who have been hard pressed, usually  private or small public funds which were relatively highly geared. Pricing is presently stable with yields between 8% and 9%, which seems about right for this market. Investor focus has turned to rental growth and the assurance of the future rental stream.

The main sellers will be developers and investors who need to off load their assets to realise profit and/or ensure healthy LVRs and IRCs. Purchasers with the opposite parameters are seeking sound properties for the future. However the improvement in credit availability has ensured some transactions have occurred, mostly under $3million, with a proportionately high number of these under $1million. Vacant buildings still comprise the majority of sales, with investments slowly increasing.  The number of land sales remain low but are increasing. Meanwhile, when was the last time one saw the difference between interest rates and yields widening and approaching 4%?

Although properties of less than $5million have seen a low turnover, with rents and yields softening, there has not been either a drastic drop in rates or a blow out in yields.  This is probably related to the low release of stock into the market, the lack of demand and relatively low business confidence. 

Banks are a little more relaxed with their credit and have increased their LVRs for some investments to 70% while decreasing their interest rate cover demands…a much sought after relief.  Although the RBA is presently holding the cash interest rate, and we may see another quarter or half a percent drop before the end of 2012, the demand and cost of capital over the next few years will eventually drive interest rates back up.

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

Land sales are few and this situation will prevail until bank policy changes.  Although construction costs have declined, long approval times, 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.  The firming of yields will be last but this will be awhile yet.

Although leasing activity has been variable for some time, it is coming back strongly.  Leases are generally shorter but some good ones 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.  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 with the current one around the bottom, now is timely to get involved. In other words, for those who can afford to buy or lease do it soon! Just keep reminding yourself of the growing differential between the long term interest rates and the yield range, and do not forget depreciation.

Sales activity has been greatest under the $3 million mark, and it is over this price tag where the best buying will occur. If you are able, purchase as early as possible before demand increases and forces prices higher.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 shorter leases or receive earlier than usual market reviews and to ensure that annual reviews include uncapped CPI.

Phil Ainsworth
September 2012