The Q2 national accounts confirmed that Australia has reached 21 years since the last economic recession (1Q91 to 2Q91). The past 21 years has covered the Asian financial crisis, the tech wreck and the global financial crisis. The Australian economy (now measured at AUD 345.1 billion) is twice as large (in constant dollar terms) in mid-2012 as in 2Q91. To put this figure in perspective, the US and UK economies have grown by 173% and 156% over the same period. In late-2012, it is likely that Australia will surpass Spain as the world’s 12th largest economy, despite only being the 52nd largest in terms of population.
The Australian economy has experienced significant structural changes over the past 21 years. The manufacturing share of Gross Value Add output (excluding ownership of dwellings) has declined from 14.5% in 2Q91 to 8.8% in mid-2012. Australia has not become more dependent on the resource sector. The much-vaunted mining sector has maintained its share of national output – 8.7% in 2Q12 compared with 8.9% at the start of the economic upturn. The service sector of the economy has experienced the largest increase in the share of national output. Financial & Insurance services share of output (11.5%) has risen by 4.2 percentage points and Professional services (7.9%) by 2.4 percentage points between 2Q91 and 2Q12.
Commercial property market returns are highly correlated with GDP. Capital values hit a cyclical trough in late-1993 following the early 1990s recession. Commercial property has delivered a solid unleveraged return of 10.4% per annum between 4Q93 and 2Q12. High commercial property market returns with low levels of volatility has enabled Australian commercial property to deliver stronger risk-adjusted returns than the US and UK. Further analysis of Australia’s outperformance is covered in an upcoming Jones Lang LaSalle white paper – Real Assets and the Asia Pacific: Australia will benefit from structural changes in asset allocations and geographical weightings.
The Australian economy, however, faces a number of short-term economic headwinds. The peak in resource investment is anticipated to occur over the next 24 months. At the same time, there will be fiscal consolidation as the Federal Government is committed to bringing the budget back to surplus over the 2012/13 financial year. Nevertheless, the Reserve Bank of Australia still expects the domestic economy to grow between 2.5% and 3.5% in 2013 and 2014.
The physical market conditions across the Australian commercial property market are supportive of moderate rental growth and capital value appreciation. The national CBD office market vacancy rate is 7.9% – the mid-point of equilibrium, while for enclosed shopping centres and institutional-grade industrial facilities, the vacancy rate is around 3.0%. The supply-side of the equation is well managed and completions are expected to be below historical averages in most sectors and markets over the next three years.
With the domestic economy growing around trend over the next two years, and limited supply coming into most markets, commercial property in Australia is well positioned to deliver solid risk-adjusted returns for investors over the medium-term.
