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What’s ahead for commercial real estate in 2017?

08-Dec-2016 09:52:37

NAI Harcourts leaders from around Australia give their perspective on where the commercial market is heading as we approach 2017, while also reflecting on the past twelve months of commercial activity in their region.

 

Overview of Australia

Australasian Chief Executive Officer, Richard Laery

Throughout Australia over the last year we have seen very strong growth in the commercial sector. The NAI Harcourts business in Australia is up over 40% in both written and settled value over the past twelve months, and I expect this trend to continue into 2017. Clients are experiencing challenging, financial, funding issues with commercial and industrial properties and businesses. There is a large gap in yields between ‘B’ grade commercial and industrial properties and ‘A’ grade properties with long leases and strong tenants, with investors looking for security.

With the lower interest rates we are continuing to see yields drop for prime stock, however some businesses are really finding the market conditions tough and are facing strong head winds.  It is a very interesting time in the commercial property market going into 2017. There are many opportunities for the savvy investor and owner occupiers that can leverage and use these low interest rates to their advantage.

 

Brisbane North with Phil Grant

The commercial and industrial north has seen continued growth albeit at slightly lower sale and rental values. We have continued to see tenants and purchasers favour newer style building and land opportunities over existing older style buildings. The availability of land in some areas has allowed the developers to take advantage of the lack of good quality stock in the market place. Enquiry levels has maintained a steady level throughout the year for both leasing and purchasing and should continue into the new year.

Industrial office warehouse leasing has continued to be a significant portion of the transactions.

Lending rates have continued to be a sticky subject with most purchasers with almost each purchase being on a case by case basis. Developers have had to have some pre-commitment to get the initial green light to move ahead and in some instances, be fully committed prior to commencement.

I believe there will continue to be steady enquiry levels heading into and throughout next year. Given the lack of quality stock we should see an increase in development stock entering the market with good take up from both owner occupiers and tenants. Yields will remain tight with continued interest in long term leases, well positioned stock and good quality tenants. Well positioned new office warehouses will continue to be a safe bet moving forward.

 

Melbourne with John Georgiou

The Northern suburbs of Melbourne are performing very strongly with some large land estates selling out and most new developments selling off the plan to both owner occupiers and investors.

The majority of transactions have been owner occupiers taking buildings from $1.2 million to $3.5 million. We have also transacted a few investment sales off plans which we haven’t seen for some time.

Low interest rates are making it attractive to owner occupiers which has resulted in many of our transactions taking place, however because of this the leasing market has slowed down considerably.

Most stock we have is industrial and new. Many of the premium locations are performing very well so I would be suggesting investors explore developments from off the plan, as many investors are buying modern office warehouses with all the features that would make them appealing to the leasing market.

South Australia with Gary Taplin

South Australia’s economy is still in a relatively stagnant state despite some improvement in the rural and mining sectors and growth is predicted to be down to around or below 2%.

 

Retail turnover in South Australia has surprisingly increased in the last quarter to show an annual 4.3% rise and prospects look good for the near term, even with confidence before at a low ebb, impacting on generally consumption patterns.

There has therefore been a recent lift in confidence although vacancy rates in the city remain above 12%. There has been massive growth in high rise apartments, and some huge schemes such as the upgrade of Darlington Expressway at over $1b, a similar amount on South Road, Torrensville and the announcement of a $1b upgrade of the old Royal Adelaide Hospital site.

Consequently, stock is very tight with only a few pages of advertisements each week, and yields have been driven even lower to 5 - 6.5% for investment material, no matter what the price range.

We see opportunities in this market for retail, retirement related construction, religious groups, land subdivision and selected parts of the industrial market following on the announcement of the commitment to the shipbuilding industry by the federal government.

 

Tasmania with Warrick Hobart

Business confidence in Tasmania remains around the highest in the country according to recent business surveys.  After several years of weak economic activity, Tasmanian economic growth is expected to be at 2.5% this year which will be the best growth rate since 2007-2008.  

The majority of activity in the commercial real estate markets in Tasmania is predominantly driven by investors, with record yields recorded following recent sales of CBD retail and office buildings.

Local buyers taking advantage of low interest rates are driving yields down across commercial Tasmanian markets, with office and industrial yields also improving with recent sales showing yields of 7.5% to 8.0%. 

The increased levels of Tasmanian business confidence and subsequent improved levels of commercial real estate transactions in both the owner occupier and investor markets, is attributed to both a change of state government in 2014 and reduced interest rates in late 2014.  Given that low interest rates and strong demand from investors for secure income yields will continue into 2017, it is likely that prices will continue to increase, particularly as supply reduces. 

We expect continued demand for well-leased Tasmanian commercial investment properties in 2017, with yields continuing to compress, particularly as mainland market demand for Tasmanian investment opportunities start to influence local investor expectations.  The leasing market will continue to be subdued with the majority of transactions restricted to national, with locals trending towards owner occupation given the low interest rates.

The stock in demand and attracting the most competition are new retail/office/warehouse developments under $500,000 with a minimum 5-year term leased to a recognisable branded tenant with minimum 3% annual increases.  We expect yields for this type of stock will be around 6.5% to 7.5% in 2017.

Western Australia with Tony Romano

The Western Australian commercial real estate market has been soft over the past twelve months. There are however, areas close to the Perth CBD, such as Victoria Park that are doing very well, with properties in demand resulting in strong property values.

Transactions vary from retail shops, small commercial properties, development sites and several business broking transactions ranging from cafes to restaurants.

Whilst interest rates are at historical low levels, banks’ lending criteria is making it difficult for borrowers, by way of lower LVR’s and higher funds contribution by buyers. Banks risk adverse approach to lending at the moment is definitely contributing to market conditions in Western Australia.

I am of the view that the property market in general in Western Australia has bottomed out and that signs of some recovery will be evident in 2017. With this is mind the best stock to purchase would be stock with yields of 6% to 7% per annum, with the prospect of long term capital growth.

 

Gold Coast with Jason Luckhardt

In the Gold Coast, there has been a general return to confidence across most commercial sectors after a prolonged lull. Whilst residential construction across South East Queensland is now in flux the Gold Coast lifestyle and tourism drivers continue to see retail and prime office space experience in better demand than other nearby markets. 

Predominant transactions have been in retail, office leasing and sales. There is an increase in interstate interest as southern markets appear to tighten ahead of our local markets faster. The rates are encouraging but it is still very difficult to secure funding and valuations are tight. 

The industrial leasing market is even tougher with a considerable amount of latent stock. Retail will continue to have strong enquiry but the end users are cautious about the rates of rentals and scrutinise harder than before. 

As an investor, the best stock to purchase looking forward to 2017 would be the bigger the better. The small rental product that attracts the less sophisticated investors also has the effect of attracting less quality tenants.

Victoria with John Evans

The business sales market of North Victoria has been considerably strong.  Shepparton and the Goulburn Valley has seen a slight improvement in overall economic activity with an increase in business confidence.  Listing enquiries have maintained momentum and in some cases improved slightly with a consistent flow of business transactions being conducted. 

The overall business broking landscape remains competitive, especially in metropolitan areas.  Prices achieved remain challenged, mainly due to tight lending conditions, and oversupply in certain sectors. Hospitality, retail, and transport businesses have been most common in terms of purchaser enquiry levels and sales achieved in recent months.

If I was an investor seeking yield, I would be taking a serious look at sections of the SME business market. There are a number of very strong businesses available that could be run under management with broad oversight from an investor or non-executive board set-up.  Prices remain highly attractive to buyers, and the return on investment far exceeds anything realistically available in passive investments such as property, shares or cash.