Positive sentiment for commercial property highest in seven years

by Nick Lenaghan  (afr.com – 22 February, 2017)

Confidence in the commercial property sector is at its highest level ever on the back of a boom in hotels and strong returns from city office towers, according to a National Australia Bank survey.

The bank’s Commercial Property Index has risen five points to 21, its highest level since the survey began in early 2010.

The bank’s chief economist, Alan Oster, said the surge in sentiment was due to big gains in CBD hotels and small gains in the office sector.

“While we continue to see an uneven performance across sectors, the performance of CBD hotels has more than offset the lower sentiment that we’re seeing in both retail and industrial markets,” he said.

Survey respondents have very strong expectations for growth in hotel occupancy, as well as capital gains and increases in revenue per available room, a standard industry metric.

In its others findings, the survey found office property is expected to provide the best income returns over the next one or two years, led by very strong growth in New South Wales.

Retail and industrial rents are predicted to grow modestly in all states except Western Australia.

Respondents expect vacancy in the office and industrial markets to fall over the next one to two years and rise in the retail sector.

Underscoring that expectation, a wave of retailers have collapsed or shut stores since Christmas, including clothing retailers Marcs and David Lawrence, along with Herringbone and Rhodes & Beckett.

“By state, sentiment and confidence also continues to be much stronger in NSW and Victoria,” Mr Oster said.

“Queensland showed some improvement, but Western Australia is still very weak.”

Six months ago the NAB index told a different story, with the outlook for commercial property waning overall, despite confidence in retail real estate hitting a six-year high.

Hopes in the hotel sector have been building as a wave of development gets under way to meet demand.

A massive injection of fresh supply is due this year with new hotels to open in Sydney, Melbourne, Brisbane, Adelaide, Canberra and Perth.

As earnings season progresses, it has become evident from portfolio valuations and capitalisation rates that the retail and commercial property market has come a long way from the distress of the global financial crisis.

More developers are looking to begin new projects in the short term, the NAB survey found,  although fewer of them are looking at residential projects.

That scaling back, according to NAB,  may be a response to the large apartment pipeline already in place, a source of ongoing concern to the Reserve Bank of Australia among others.

Around 250 panellists – a variety of property sector professionals – participated in the NAB’s index for the fourth quarter of 2016.

03 Mar 2017