While investors are gloomy about the outlook for residential property, there are more positive signs in the commercial property sector.
NAB’s latest Commercial Property Index, released last week, shows an increase in positive sentiment among property professionals in the December quarter last year.
And commercial property trusts listed on the Australian Securities Exchange have proved to the best performing asset class over the past 12 months.
According to the NAB report, the improvement in sentiment was driven by the office sector.
In terms of rental incomes, industrial property rents grew by an average of 0.9 per cent in Deceber quarter and office rents grew 0.7 per cent. Property professionals expect rents in the office sector to grow by an average of 1.9 per cent over the next two years. The expectation for industrial property is for rents to rise by an average of 1.7 per cent over the next couple of years.
Property professionals are bearish about the retail property market, which has been hit by slow retail spending. They expect rents to fall by an average of 0.8 per cent over the next two years.
Expectations for capital growth are for office to grow by an average of 1.3 per cent over the next two years and industrial to grow by 1.1 per cent.
Once again, professionals are bearish on the retail property sector, expecting values to fall by 1 per cent over the next couple of years. They are also extremely bearish on CBD hotels, forecasting a 4.6 per cent fall in values over the next two years.
The report says fewer developers are planning to start new projects in the next six to 12 months, which NAB says may be a reflection of tighter lending conditions. Professionals said getting access to credit was harder in the December quarter than at any time over the past eight years. Equity funding conditions are also more difficult.
With development activity dwindling, expectations are for lower vacancy rates over the next couple of years, which will support rental growth.
Office vacancy rate expectations are lowest in Victoria, at 4.3 per cent, and New South Wales (4.9 per cent). The average vacancy rate expectation nationally is 7.8 per cent. If those expectations are met, office vacancy rates will fall to their lowest level since 2013.
Looking at the regions, sentiment was strongest in Victoria and NSW, flat in Queensland and down in the other states and territories.
According to Morningstar, Australian real estate investment trusts returned an average of
13.1 per cent over the 12 months to the end of January – the best return of any asset over that period. Over the past five years A-REITs have produced an average annual return of 13.7 per cent a year – again, the best return of any asset class over that period.