Underlying Opportunities In The Australian Property Market


Sale and leasebacks, counter-cyclical investment plays and yield convergence. These are just some of the trends and opportunities expected to emerge in Australia in 2016 according to CBRE’s new Real Estate Market Outlook report.

The report analyses the office, retail, industrial and residential sectors across Australia and highlights rent growth prospects in most market segments underpinned by low interest rates and an improvement in demand conditions.

CBRE’s Head of Research, Australia, Stephen McNabb said low interest rates and Australia’s attractive returns compared to the rest of the world had supported yield compression across the board. However, he noted that a shift was occurring as yields approached the bottom of the cycle.

“Yield compression has driven strong investment returns in recent years. However, investors will now increasingly be looking at the income growth fundamentals of their assets and what they can do to improve the growth potential of their individual assets and property portfolios,” Mr McNabb said.

Some of the trends and opportunities highlighted in the Outlook report include:

* Counter cyclical investment – As Brisbane and Perth reach the trough in their rent cycles (with prime net effective rents having fallen by 42% and 51% respectively), Mr McNabb said CBRE Research believed the worst had past. “In Brisbane, we forecast that net effective rents will level out in 2016 while our base case for Perth sees prime net effective rents fall a further 5-10% in 2016. We think that as 2017 approaches there will be increasing interest from counter-cyclical investors, with the focus likely to be for prime assets,” Mr McNabbb said.


* Potential yield convergence – The Market Outlook report highlights that the office for vacancy and rental growth in some markets is superior to the outlook in the prime market. “These markets could experience some degree of yield convergence in 2016. The most likely markets are Sydney CBD, Chatswood, Southbank and Adelaide. Broader support for yield convergence could also occur if 2016 sees a dearth of acquisition opportunities in prime markets but a continuation of strong investor demand,” Mr McNabb said.

* Demand for student accommodation – CBRE’s report highlights that the lower AUD augers well for continued growth in international student numbers, particularly in markets such as Brisbane where there is a high secondary vacancy rate.

* Changing retail mix – CBRE’s report highlights that demography and consumer preferences should influence retail landlord decisions in repositioning centres. This includes growth in our Asian-born population with different shopping expectations.

* Sale and leasebacks - with yields at historically low levels in many markets and submarkets - and with a deep pool of capital - owner occupiers have an opportunity to offload standalone assets and portfolios. Mr McNabb said portfolio sales would particularly appeal to overseas investors and this would contribute to vendors achieving maximum pricing.

Other key points in the report include:

Office – Rent growth is now evident in Sydney, Melbourne and Canberra and 2016 looks like being the bottom of the rent cycle Brisbane and Perth. However, the report highlights that office incentives are likely to remain high in most office markets, which will continue to favour tenants seeking to relocate. Occupiers have the opportunity to lock in high incentive packages during lease negotiations to take advantage of the current market conditions.

Industrial – The lower AUD is providing some support to the sector, as is the high level of construction activity. As a result, rent growth in 2016 is likely to improve in most Australian markets, particularly as new supply eases. The report also highlights that opportunities in the sector revolve around the improving efficiency of consumer goods distribution and delivery in addition new infrastructure and growth corridors.

Retail – While CBD retail has experienced the strongest rent growth in recent years, evidence of rent growth has now broadened across most retail segments. Ongoing tenant demand is being driven by foreign retailers with a relatively low penetration of such brands into the Australian marketplace.

Residential – The building cycle appears to have peaked in most markets, except Sydney, moving to a state of balance or oversupply. This means that slower rates of price and rent growth are expected in 2016. However, the risk of a material price correction appears low and would be unprecedented in a period of low unemployment and low interest rates, Mr McNabb said.

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