No material downturn expected for the global economy this year
No material downturn expected for the global economy this year
15 March 2016
Investors to continue to target property opportunities in Pacific
Melbourne, 15 March 2016 – The US is not headed for a recession this year and there will not be an out of control crash landing in China according to CBRE’s latest global economic forecasts.
CBRE’s Global Head of Research, Nick Axford, said the firm’s house view was that the global stock market ructions experienced in January as a result of concerns about China and the US had been an overreaction.
Speaking at CBRE’s 20th Melbourne Market Outlook presentation, Dr Axford said while there were clearly risks in the market “nothing leads us to believe that we’re going to see a material downturn in the global economy during the course of this year”.
“From our point of view we don’t think that the US is headed into a recession this year. China is slowing undoubtedly but that’s by design - there are structural changes occurring which are very necessary. But there’s nothing going on that makes us think there’s going to be an out of control crash landing,” Dr Axford said.
He noted that recent uncertainty about US interest rates had been very positive for property, with investors attracted to the combination of a real asset with a relatively high, contractually guaranteed income.
But what will happen when interest rates rise? Dr Axford said CBRE’s view was that real estate was reasonably fully priced and there not much more scope for further yield compression.
However, he added that the outlook varied from market to market and there was a clear distinction between the outlook for Pacific and the majority of the other markets in Asia Pacific.
“We see both Asian and global money continuing to target the Pacific market both this year and into the next,” Dr Axford said.
Indeed, CBRE’s Head of Research, Asia Pacific, Henry Chin said Australia was one of only two Asian Pacific markets, alongside Japan, that were expected to experience further yield rate compression this year.
This would be bolstered by continued offshore investor interest from China and from other Asian markets such as Singapore, Hong Kong and Korea - with CBRE’s latest Investor Intentions survey highlighting that APAC investors wanted to increase with investment in Australia’s office, retail and hotel sectors.
CBRE’s Head of Research, Australia, Stephen McNabb said an attraction for investors in the office market was the strong net absorption figures recently recorded in markets like Sydney and Melbourne.
Last year, about 120,000sqm of net absorption was recorded in Melbourne boosted by tenant migration to the CBD. Moving ahead, CBRE’s forecast is for 60,000sqm of net absorption per annum, which will support some rent growth this year strengthening growth in 2016 and 2017.
Another driver for the market will be an increased focus on workplace strategy, which Mr McNabb described as a “very strong, emerging theme”.
“It’s about attracting and retaining employees and landlords will have to react to that and upgrade existing assets to help tenants meet those needs going forward,” Mr McNabb said.
The Market Outlook research presentation was followed by a panel discussion, key points from which are summarised below:
Ms Steele told the audience that the Asset Services industry was being shaped by a heightened focus on tenants as customers. Indeed, she noted that in many new leases the word tenant was being removed altogether.
“I really believe the term tenant is dead. That feudal relationship between landlord and tenant is being flipped on its head. It’s no longer a case of landlords dictating how a building will be run and presented because more and more, the customers are demanding different ways they can work in their buildings,” Ms Steele said.
This is extending to landlords providing a higher level of customer service to retain their occupiers – be it concierge services, lunchtime yoga sessions, school holiday programs or laundry services.
Ms Steele also tipped that wellness would become a significant focus for Melbourne landlords, either through applications for formal WELL ratings or through the launch of wellness programs.
Mark Coster – Senior Managing Director, Victoria
Mr Coster said strong pricing on Melbourne office assets was expected to continue this year, which would lead to continued cap rate compression – albeit at a slower rate than in 2015.
He also noted that there was particularly strong activity in the B-grade market for assets priced between $30 million and $100 million.
“People are really starting to see leasing risk as an opportunity not a threat which is the big change for the market,” Mr Coster said, adding that buyers were looking at assets where there was the potential for income growth.
Offshore buyers will continue to be a key driver of the market, with Mr Coster predicting that 70% of the capital invested this year in prime Melbourne office assets would come from overseas buyers.
He also expects that at least $4.5 billion in real estate will trade this year in the Melbourne CBD and that the city office cap rates will dip as low as 4.75% in 2016.
Marc Mengoni – Director, Office Services
Mr Mengoni said the leasing market fundamentals in Melbourne were very positive, with the city benefiting from a low office vacancy rate of 7.7%, strong enquiry strong and a good development pipeline.
Another positive indicator, he said, was the growing number of larger tenants coming to the market, wanting whole floors of 1,000sqm to 2,000sqm.
Mr Mengoni noted that the tech sector was particularly active and these tenants would be a litmus test for how the Melbourne office sector would evolve.
“They’re early adopters of technology, they like flexible working spaces and they’re a vision into where we’re going,” Mr Mengoni said.
He also noted that demand from tech companies require increased landlord flexibility to accommodate what could be, say, a 200sqm tenant today with the potential to grow to 2,000sqm within two years.
Mr Mengoni’s bold prediction is wellness accreditation will become the new NABERS rating.
“It is coming and I do believe tenants will pay a premium for it,” Mr Mengoni said.
Andrew Leoncelli – Managing Director, Residential Projects Melbourne
Mr Leoncelli said the buyer demand from offshore remained strong, albeit the market would not witness another Australia 108 - and the level of buyer exuberance that had solicited - 2016.
He also noted that while there were some oversupply issues in Melbourne these were in pockets and not indicative of the overall market as evidenced by successful CBRE project launches this year in Newport and Richmond.
Mr Leoncelli said one of the shifts in the market had been the emergence of the three-bedroom apartment buyer. This was the case right across Melbourne, he said, with sales of three bedroom apartments had tripled in the past 24 months, driven by cashed up downsizers.
In relation to the CBD market, Mr Leoncelli did note some headwinds, related to certainty of planning.
“We’ve seen lots of our international clients move to Brisbane where the planning framework is more regulated and more pro-development,” Mr Leoncelli said.
However, on the flipside, Mr Leoncelli said that with limited new stock in the CBD and pent-up demand the city market would begin to normalise.
Mark Wizel – Senior Director, Melbourne City Sales & Victorian Retail Investment Properties
Mr Wizel tipped that Chinese capital would continue to target Melbourne, despite the ongoing turmoil in the Chinese economy.
“Chinese capital is very sticky and although there might be a lot of turmoil in the Chinese economy they will be just as strong if not stronger than ever before this year. They will also become big buyers for sub $100 million retail assets in all capital cities,” Mr Wizel said.
He also foreshadowed that Australia would become a target for new sources of capital with the emergence of a range of Asian private equity funds.
Another potential source of capital would be private money from Hong Kong.
“Watch what happens with the big Hong Kong privates and families – they’re getting very nervous over there and they like Australia,” Mr Wizel foreshadowed.
Dean Hunt – Senior Director, Industrial & Logistics
Mr Hunt said transaction activity last year in the Melbourne industrial market had been double that of 2013 – with that momentum having carried into this year.
With historical vacancy rates starting to trend back, amid signs of ongoing tenant demand, Mr Hunt said confidence was returning to the market and this would help push down tenant incentives.
“Incentives are as high as they’ve ever been, however with what’s happening with historical vacancy and what’s happening with tenant demand we will start to see compression in incentives,” Mr Hunt said.
He also noted that the technology sector would be a driver of the market and this would help drive demand for smaller format warehouses close to the CBD in areas such as Port Melbourne.