Actually the bottom of the property cycle was probablyin 2003 after I wrote this for CFO in late 2002.
Property has hit the bottom of the supply and demand cycle and tenants and owners need to prepare for the next upturn. As always, the story depends on the quality and location of the property. The highest-quality, best located property has low vacancy rates and the highest rents.
As the quality of property and location decreases, vacancy rates increase and rents decrease. As a whole, commercial vacancy rates are high and rents are low. But the demand for top investment-grade property is high.
Alistair Meadows, investment director at property consultant DTZ, says: “There is a bit of a paradox in the market now. You are looking at a pretty soft and flat rental market while yields haven’t moved out.”
This means that it is a good time to renew a lease or look for a new one. It is also a good time to sell a top-quality office building. But it is not a good time to buy one.
There is no need to rush into deals.
John Elvy, chairman, commercial group, at LJ Hooker, says: “Be very careful with short- to medium-term lease commitments.” Meadows says that companies need to ensure that structures are in place to expand and contract.
Most forecasters don’t see any movement in rents for at least the next 18 months, the more pessimistic for as long as the next five years.
Tony Crabb, national research manager at FPD Savills, has little hope of an imminent takeoff. He says part of the reason is the backwash from the dot.com boom, and part the fact that Australia’s white-collar businesses are suffering badly from the Asian downturn.
There are few new business start-ups, dot.coms are handing space back and businesses are consolidating. The market may see a slight rise in rents in five years’ time, says Crabb. “Where it is now is probably as bad as it is going to get.”
“It’s about the old adage of supply and demand,” says Elvy. The economic downturn of the past year has led to declining business investment and a slowdown in demand in commercial and industrial property. According to Elvy, rising company profits and emerging capacity constraints will lead to a strong upturn in key business segments in 2003.
New construction in Melbourne and Brisbane may further weaken demand, however.
Fast forward, and rental growth over the five years to 2007 could be surprising. While Crabb doesn’t see much activity over the next five years, Elvy’s team sees big increases. In the important Sydney market, net rental increases of 53 per cent are expected (see chart).
Crabb says the Sydney CBD needs to stem its flow of occupants out to the surrounding areas. “All the good buildings are full,” he explains. “It’s what to do with the secondary ones.”
Elvy says Melbourne is expected to see a 36 per cent hike with significant increases for each state capital. Brisbane is worth noting for its forecast 99 per cent increase. Industrial rents are expected to rise by 40 per cent in Sydney and Melbourne and 30 per cent in Brisbane.
Elvy predicts a continual shift of offices from the Sydney CBD to outlying areas to “where the workforce is”, retaining small white-collar head offices in town. In NSW,
this will lead to demand in areas such as Parramatta, Bankstown and Campbelltown.
Shifting commercial locations is knocking-on the industrial sector. For example, South Sydney traditionally has been a big industrial suburb.
Now it is more commercial and residential. In Melbourne, corporates have moved offices to industrial areas where rents are low but there is infrastructure. The trend has pushed industry out of town.
Commercial property outlook 2002 to 2007
Year ended June                Rental growth (%)    Value growth
IRR
                     Gross  Net   (%)        (%)
Sydney1Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 50Â Â Â Â 53Â Â Â Â 91Â Â Â Â Â Â Â Â Â 20.2
Melbourne              40    36    84         20.0
Brisbane                    77    99    60         16.2
Adelaide                    41    50    55         16.7
Perth                 51    65    92         22.1
Canberra               39    46    56         17.8
INDUSTRIAL (prime)
Sydney (southern region)Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 38Â Â Â Â 46Â Â Â Â Â Â Â Â Â 17.1
Melbourne (south-east region)Â Â Â Â Â Â 39Â Â Â Â 50Â Â Â Â Â Â Â Â Â 17.9
Brisbane2Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 29Â Â Â Â 38Â Â Â Â Â Â Â Â Â 16.7
RETAIL
Regional                          23    22         11.7
Sub-regional                  20    18         13.1
1: year ended December
2: 2001 foreast
Source: LJ Hooker/BIS Shrapnel