Sydney, 10 December 2014 – CBRE has issued its Australian Market Outlook report, which forecasts diverging growth prospects by geography and by property sector in 2015.
The divergence will be most profound between NSW, which is benefitting from a buoyant economy, and Western Australia, where demand is contracting sharply.
At the property level, rental growth and continued yield compression is forecast for the retail and industrial markets relative to a flat outlook for the office sector, which is being restrained by higher supply.
Set against this backdrop, CBRE’s Head of Research, Australia, Stephen McNabb said 2015 would be a year for “balancing the risks as growth divergences continue.”
“Looking at markets in a broader, geographical context, the differing economic outlook between states will influence underlying tenant demand and ultimately the attraction for investors,” Mr McNabb said.
“NSW’s strong economic performance should continue in 2015, underpinning demand in occupier markets. Conversely, Western Australia will face headwinds as the mining construction boom unwinds and lower commodity prices erode state income.”
Looking at the individual property sectors, the report forecasts more favourable revenue conditions for retail and industrial occupiers, which, combined with contained supply in most markets, will provide some support for rental growth.
However, office occupier revenue growth will be low relative to past cyclical upswings, which will keep a lid on office rental growth.
At an investment level, the report highlights that lower required returns have been the main driver of yield compression in Australia for prime grade property over the past one to two years, as interest rates and risk premiums have fallen.
These macro factors have favourably impacted asset pricing, with yield compression achieved despite weakness in rental growth performance.
“In the year ahead we expect some stabilisation in required returns. The key driver of this expectation is gradually increasing interest rates, in line with a gradual improvement in the economy,” Mr McNabb said.
“The combination of these two, essentially offsetting factors, is expected to bring stability to IRR’s and hence take some momentum out of the strong yield compression story seen in recent history. In such an environment, investors are more likely to focus on rent growth expectations.”
“Hence retail and industrial assets are better placed to experience yield compression in 2015 as rent growth is forecast to improve.”
However, investors are also expected to remain risk averse and this will ensure that, in most cases, there will continue to be a wide spread between the yields that can be achieved for prime versus secondary assets until there are signs of stronger economic growth.
Other forecasts by sector include:
The report identifies that alternative sectors have been supporting demand while traditional occupiers are in retreat. The most notable example is the growing presence of technology companies, particularly software and web-based communication groups.
“In contrast to the hardware companies who have traditionally occupied suburban office markets, the new wave of software and web-based businesses prefer CBD and CBD fringe locations, particularly driven by the desire to attract and retain discerning Gen Y talent. Facebook, LinkedIn, Google, Wotif and Amazon are all examples of businesses experiencing growing space requirements,” Mr McNabb said
However, over the next two to three years, overall demand is expected to remain patchy, with sustained strength in occupier demand unlikely to be felt until 2016. This will keep face rental growth below 3% over the next few years.
Supply also poses a threat, with net additions to office space expected to run ahead of demand. CBRE is forecasting a 0.7% per annum disparity between demand and supply across Australia’s CBDs – equating to 125,000sqm of additional vacancy per annum – over the next three years
The lower AUD is expected to be supportive for the industrial sector, relieving some pressure on exporters and enterprises exposed to competition from imports.
CBRE is forecasting that industrial output growth in 2015 will result in growth in industrial rents, with the transport and logistics sector being a key driver.
On the investment front, demand is outweighing supply for “super prime” assets, being new or recently constructed buildings in a core location with a lease term of 10+ years and a strong covenant.
“Investment market demand for this type of product is outweighing supply, consequently yields in this space continue to tighten and an increasing number of groups are beginning to adjust their buying criteria,” Mr McNabb said, adding that with 2015 could potentially see some yield compression in the secondary market.
“While some investors are finding themselves priced out of the super prime market, the potential to add value to secondary assets in core locations has become a more attractive approach to investment.”
The report highlights that retail rents are beginning to rise, with the continued entrance of new foreign retailers increasing demand for prime CBD space. There are no perceived supply risks and, against a backdrop of improving fundamentals, investor interest in the retail sector is strong.
“In 2014, more than a dozen foreign retail brands were introduced to the Australian market, including H&M, Forever 21, Uniqlo and Furla,” Mr McNabb said.
“Foreign retailers have rolled out an estimated 25%-30% of planned outlets and regional centres are expected to benefit from this ongoing expansion. For landlords, one option could be taking back space from department stores, whose turnover growth since 2008 has been lacklustre at best.”
CBRE is forecasting that large format retail assets will deliver the highest retail returns over the next five years at circa 10%.
Weaker capital growth is expected in 2015 at a national level, as a consequence of household income growth being stable rather than accelerating and affordability ceilings having been reached in some markets due to strong price growth in 2014.
Investor activity is also expected to cool in 2015 as current trading is at historically high levels.
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About CBRE Group, Inc.
CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (in terms of 2013 revenue). The Company has approximately 44,000 employees (excluding affiliates), and serves real estate owners, investors and occupiers through more than 350 offices (excluding affiliates) worldwide. CBRE offers strategic advice and execution for property sales and leasing; corporate services; property, facilities and project management; mortgage banking; appraisal and valuation; development services; investment management; and research and consulting. Please visit our website atwww.cbre.com.au.