Australia: Outlook for 2016 – will be hard to beat 2015

January 27, 2016 / By  

We will look back on 2015 as an exceptionally good year for many Australian commercial property markets. Capital values rose to record levels, transaction volumes were robust, foreign direct investment continued to increase, occupier demand improved, and rental rates stabilised. With this in mind, it’s an opportune time to examine what the Australian commercial property landscape might look like over the next 12 months.

Transaction volumes are expected to remain robust across all commercial sectors (office, retail, and industrial) in 2016. However, volumes are unlikely to match the very high levels recorded in 2015 (AUD 29.1 billion). With the asset pricing cycle nearing its peak, many investors (particularly domestic groups who generally have a higher cost of capital) will be unable or unwilling to meet vendor pricing expectations. Nonetheless, strategic asset divestment may increase. Some opportunistic landlords are expected to capitalise on favourable pricing metrics, particularly in Sydney and Melbourne where investment demand is projected to remain particularly strong.

Given the approaching peak in the pricing cycle, yields are forecast to generally stabilise across all sectors during 2016 (although some markets are expected to still show some moderate compression over the year). With a predicted increase in real bond rates, and a (relative) tapering off in transactional activity, 2016 is forecast to be the low point in the yield cycle across many markets. Historically, the yield low point has only been maintained for a few quarters before yields begin to soften. However, given the macroeconomic environment of broadly lower growth, inflation and interest rates, we expect this low point of the cycle to persist throughout 2016 for most markets.

The Sydney and Melbourne investment markets are expected to outperform on a national basis, in line with the projected stronger occupier demand. Broadly across all sectors, occupier demand in Sydney and Melbourne is predicted to outpace other markets. Office demand is expected to be underpinned by rising employment levels and robust state economic growth, while retail and industrial demand will be supported by a strong residential market, high retail turnover, and solid housing investment.

At the other end of the spectrum, the downturn in the resources sector will continue to negatively impact occupier demand in Brisbane and Perth over 2016.  However, after three years of very low occupier activity, demand in 2016 is expected to stabilise, particularly in Brisbane where an economic recovery is expected this year (3.1% State Final Demand growth, Deloitte Access Economics) and which recorded office net absorption of 26,600 sqm in 2015, above the 21,700 sqm long term average.

Nonetheless, there are clear macro (downside) risks to the Australian commercial property market in 2016. The most visible of these risks is a slowdown in China. Other potential risk factors include a slowdown in the residential sector after record construction activity in 2015, continued financial market volatility, and a reduction in global property capital flows, of which the Australia is a large recipient (1st in Asia Pacific and 4th globally in 2015*). While 2016 is predicted to be a solid year, these factors should be considered when assessing Australian commercial property markets.

*As at 3Q15.

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