Industrial leads commercial property boom

CBRE said the appeal of the industrial sector lies in its high yields and its prospects for a rent growth recovery late next year

Transaction volumes in the Australian commercial property market are set to reach the second-highest annual total in a decade, with industrial being the stand-out in a second quarter that saw $6.1 billion in commercial property transactions, according to CBRE sales data.

CBRE said the appeal of the industrial sector lies in its high yields and its prospects for a rent growth recovery late next year, with a particular focus on super-prime logistics assets.

CBRE also noted that the biggest market shift was an enhanced focus on high-risk assets, as more investors are focused on leasing risk or vacancies. Consequently, portfolio sale activity is on the rise and there has been a compression in yields for non-core industrial investment stock.

Industrial turnover activity met CBRE’s Q1 expectations with sales more than doubling over the year, in comparison with declines in office and retail. Industrial delivered close to $900 million in sales in Q2 – an increase from the $400 million transacted during the same period in 2013.

Office space

Demand for office space has also increased substantially in the past year, according to BIS Shrapnel chief economist Frank Gelber.

“The underlying demand for office space… has picked up significantly since last year’s slump,” writes Mr Gelber in a blog for <i>The Australian</i>.

“It’s not strong, but it’s positive, and is still only half the average for the last decade. We expect it to underwrite a recovery in net absorption later this year. The current uncertainty about the Federal Budget could delay corporate decisions to take on more office space, but we’ll get through that.”

BIS Shrapnel's latest quarterly underlying indicator for Australia’s office markets shows demand at 370,000 sqm - a substantial improvement from a year ago. However, demand remains well below the 10-year average of 660,000 sqm. BIS Shrapnel sees employment levels as a key driver behind the fall in office demand.

“All the weakness of net absorption over the last year can be explained by the fall in underlying demand,” wrote Mr Gelber. “It was hit particularly hard by the weakness of business services and the corresponding fall in employment as companies aggressively reduced staff to contain costs and improve productivity.”

That was aided by weakness in the telecommunications, finance and manufacturing sectors, added Mr Gelber. BIS expects rising demand for office space to be initially slow, building momentum through the second half of the decade.

“We don’t expect a sharp rebound in underlying demand back to long-term averages. If anything there is a risk of softening in the next quarter…I expect demand to improve slowly at first and build momentum through the second half of the decade."

Retail

On the retail front, CBRE said the occupier market still faced challenges, with stabilised income a greater focus than short-term income growth. However, activity remained strong across the retail sector’s broad spectrum of assets.

Listed property and financial services groups are setting the pace at the top end of the shopping centre market with Challenger striking a deal to buy a near $130 million centre in Adelaide and Mirvac Group chasing the $300m-plus Birkenhead Point in Sydney’s inner west, among others.