Details from the API's latest economic events

A summary of VIC's State of the Market conferece, the NSW Propetty Market Outlook, and the QLD Economic Indicators Luncheon

Speaker Nicki Hutley, chief economist, Urbis

This property newsletter we've provided a summary of Victoria's State of the Market conferece; the NSW Propetty Market Outlook, and the Queensland's Economic Indicators Luncheon.

Victoria’s 2014 State of the Market

February 7th saw the Victorian property populace gather at the Melbourne Exhibition Centre for the API/REIV 2014 State of the Market conference.

Economic overview

The event’s keynote economic speaker was Nicki Hutley, chief economist and director of policy economics with Urbis. Ms Hutley detailed why the national economic outlook for 2014 is positive, with particularly robust activity predicted in the residential sector.

“I think we’re over the worst of the GFC, and we’re going to start to see momentum building,” she said. “We’ve got a much kinder global economic environment, we’re seeing Europe start to show signs of recovery, [and] we’re seeing America really moving into a solid phase of recovery.”

At home, Ms Hutley believes we will start to see the end of the rate cycle easings, which should support activity in the property sector as we’re starting to see some pick up in credit demand, though she said it’s unlikely to go into the boom cycles we’ve seen in previous years.

Residential overview

Robert Papaleo, director of strategic research with Charter Keck Cramer, spoke about residential strength leading into 2014.

“The residential market in 2014 will continue to experience robust conditions, following the momentum that has been established in 2013 where we’ve had historical interest rates and very strong population growth,” said Mr Papaleo.

Mr Papaleo explained that much of the gains from 2013 were largely clawbacks from those home buyer incentives given away in 2011/2012 and we’ve now got back to situation where house prices are near their previous peak. He also notes that 2014 is going to see an unprecedented level of new apartment supply delivered across Melbourne, as part of a new wave of major international developments.

Industrial overview

Leading away from residential was a talk by Nerida Conisbee, national director of research with Colliers International.

“Leasing demand is stable yet rents are pretty much going nowhere, but also we have got a lot of activity occurring on the investment side,” she said.

She explained that there is still quite a high level of supply that should lead to stable rents, though she sees slight growth occurring in the city fringe market, primarily as a result of an increasing office component. Ms Conisbee says over 2011/2012 activity was dominated by offshore investors, with the most active investors being the Real Estate Investment Trusts (REITs).

Office overview

Martin Reynolds, head of valuations and advisory with Jones Lang LaSalle, said activity for the commercial market had been subpar in 2013, with the vacancy rate in the Melbourne CBD increasing to 11% – the highest level since the 1990s.

“The key question moving forward for the physical market is, where will demand be derived from?” he asked.

“We take comfort from the recovery forecast in the private sector housing investment sphere..”

Given the soft tenancy market, Mr Reynolds said it was surprising that 2013 was a record year for commercial investment sales, with more than 50% assets transacted in 2013 than the next best year which was in 2010. He said this saw a sharpening of yields over the primary market, and he expects this will spread to the secondary market throughout the first quarter of 2014.

Retail overview

Finally, Ian Shimmin, Urbis Director, delved into the state of the retail sector, starting with the challenging area around discretionary items, with poor spending in this area since the wake of global financial crisis.

Shimmin predicts future growth to reach from 2-2.5% in 2013 to around 4% this year, and 5-6% in 2015-2016, claiming this will be spurred by change in retail price inflation, which was “virtually benign” in 2013, but also as a consequence of consumer confidence.

Lastly, he mentioned a report from the National Australia Bank (NAB) that claims a lower rate of growth in online sales, meaning fewer funds will be diverted to offshore brands via the Internet, meaning there will be “more in the domestic retail kitty”.

The API New South Wales division’s Property Market Outlook 2014

Four sectors of the Australian property market were analysed by a panel of experts at the API NSW Division’s Property Market Outlook 2014 last month.

Forecasts for the residential, commercial, industrial and retail sectors were provided by Michael Blythe, Dwight Hillier, Jason Edge and David Harrison.

Residential outlook
Michael Blythe, Chief Economist, Commonwealth Bank of Australia

Mr Blythe said the residential market was nicely on track…“a predicted 180,000 new dwellings in 2014 and 2015".

"Residential is a very important part of the Australian economic story.”

He did not believe there was enough evidence to point to a housing bubble, highlighting the fact that the current situation was not “an excessively debt-driven model”.

Mr Blythe believes interest rates will rise in 2014, as rising house prices add to the case for no further cuts.

On the topic of jobs, he noted that lower job security concerns could increase the potency of current policy settings but added that recent bad news about job losses in manufacturing fed fears about job security

Mr Blythe said several things need to go right if good economic outcomes are to be maintained, including a successful navigation through the three stages of the resources boom, a successful growth and inflation transition, while a housing “bubble” must be avoided.

Commercial outlook
Dwight Hillier, Managing Director, Valuation & Advisory Services, Colliers International

Mr Hiller said there was a heavy focus on CBD markets and that the outlook for the commercial sector would continue to grow. He highlighted the increase in offshore purchasers, saying “the Chinese are here in a big way”, and noted that many were here for conversion activities.

Mr Hillier also said a sub 6% transaction (prime grade) in Sydney CBD by mid-2014.

The leasing markets were the key to capital growth, with incentives at, or close to, peak levels in most markets. There was limited effective rental growth forecast for 2014.

Mr Hillier said those who are likely to take advantage of market conditions to sell included state governments, private investors and developers.

Mr Hiller warned that improved performance of offshore markets and political and legislative changes offshore, that restrict inbound investment, could draw capital away from Australia.

Industrial outlook
Jason Edge, NSW Senior Director, Industrial & Logistics Services, CBRE

During a comprehensive look into the industrial market, Mr Edge revealed a number of findings in detailed graphs including the latest on yields performance, what is driving yield compression, NSW supply and land values, along with current and forecasted market rents.

He concluded that eastern seaboard yields continue to strengthen, while a strong local and international demand from REITs was being met by strong supply, particularly in western Sydney, while there is also a growing demand for englobo sites.

Retail outlook
David Harrison, Executive Director, Charter Hall

Mr Harrison said retail turnover remained below trend, with non-discretionary expenditure significantly outperforming over the short and longer term. Department stores remained a significant drag on overall performance growth.

However, Mr Harrison said the signs pointed towards “uplift”, and made particular mention of retail development in regional shopping centres in strengthening consumer confidence.

He noted that the poor performance of bond funds in a rising interest rate cycle off a very low income base, makes secure property investment very attractive. Given the strong performance of equity markets, that led superannuation assets to grow by record levels, a significant weight of money is likely to move toward property with secure income streams. Historically, retail has proven the optimal asset class for this.

API/FINSIA Queensland Economic Indicators Luncheon

On February 7th at the Brisbane Convention & Exhibition Centre, Westpac economist Bill Evans acknowledged that his forecast of two more cuts to the official cash rate before the end of the year is at odds with other economists.

“I’m probably the last drowning man who thinks that’s possible… but my view is the dynamics that the Reserve Bank described today, on why interest rates are on hold and why they’re likely to rise – I think they’re a little too optimistic around a flaccid world economy,” Mr Evans said.

Mr Evans highlighted strong growth in the property market, driven by price rises in Sydney and Melbourne, creating another wave of migration from southern states.

"If you have a clear advantage in affordability, that means population growth," Mr Evans said.

His summary for the global and Australian economies included the potential for global growth to remain weak in 2014, taking pressure off rates. He cited the Federal Reserve in the US, which has been tapering to a pause in 2014; with plans to tighten rates “not late (in) 2015”.

He also said he expects the unemployment rate to drift up to 6.5% as businesses constrain jobs growth. Confidence is likely to remain week despite low rates, he said, as inflation “scare” might temper investors in property market, in which Brisbane is catching up. He said the Brisbane housing market in particular looks poised for a strong uplift, especially with investors.

Mr Evans also said we should expect two more rate cuts in the second half of 2014, though the RBA is on hold for now; while weak business conditions, together with slow mining spend, weak world growth, weak job growth, and constrained consumers meant 2014 growth is predicted at just 2.3%.

Lastly, he noted that the weak world economy was likely to weigh on business confidence and consumers through “job insecurity” – claiming the latest election was not “circuit breaker”.