Commercial property sector struggling in June quarter, but expert says investment activity improving

Commercial property conditions continued to deteriorate in the June quarter, with sentiment falling across all sectors and is especially low in the hotels and entertainment arena, the latest NAB Commercial Property Survey reveals.

But one expert believes conditions haven’t so much deteriorated as they have stagnated, saying an uptake in investment during the last few months indicates commercial property spending is on its way up.

“Things are a little bit quieter on the occupation side, but there are a number of factors in that. I think we’re expecting commercial property activity to increase towards the end of the year,” DTZ Research commercial property research director David Green-Morgan says.

The NAB Commercial Property Index fell by 20 points in the June quarter, to a reading of -10 points.

Sentiment has dropped across all sectors – office, retail, industrial and entertainment. The office market recorded a quarterly drop of one point to negative eight, with the retail and industrial sectors also recording falls of 26 and two points respectively.

While the office market may be continuing to perform well, retail expectations have continued to soften due to lower consumer sentiment and sales. Rental growth is expected to be “minimal, if at all” over the next year.

“Retail sentiment has fallen significantly since the last survey for all periods. Previously considered to be sitting in positive territory and to be in the midst of mild upswing, sentiment looks to have turned heavily in the last quarter for retail property,” NAB chief economist Alan Oster said in a statement.

“In basic terms, the return to growth looks to have been pushed out by approximately 12 months when
compared to the last retail survey. Queensland respondents were easily the most negative out of respondents, with Victoria surprisingly second worst for current conditions.”

And while office expectations have managed to escape the dramatic falls recorded by the other industries, Oster says the outlook isn’t much better.

“While office rents are still expected to lead the resurgence in optimism on rental returns over the coming year, we have not seen the expectations for growth during the last survey translated into current rents.”

Melbourne was the best performing office market for developers and investors, particularly with A-Grade CBD stock, although Brisbane CBD property has been tipped to be the poorest performer of the next six months.

“Relative to last survey, and while still improving over the 12 months, Sydney looks to be losing some ground as Melbourne remains strong over the coming year,” Oster says. “Perth and Brisbane show only modest increases in performance expectations as the year progresses.”

Capital values are expected to increase over the next 12 months, but Oster notes that market isn’t performing as well now.

“While the majority of respondents still believe there will be a marked improvement from Q1 2011, the actual rate of growth has slipped for Office at 2.6% (was 3.25%) and retail 0.6% (was +2%).”

“Industrial stock, while now expected to recover approximately one quarter later than the last survey, is now tipped to perform better than retail by way of capital growth within 12 months at 1.2%. Office is still expected to outperform the other commercial sectors over the next year. As expected, the most positive capital value expectations were received on Melbourne and Sydney commercial holdings.”

Respondents to the survey also said they found debt and equity sourcing much more difficult than last quarter, with 42% of respondents planning to service more debt in the next six months – that figure is down by 50% from last quarter.

“In addition, the percentage of respondents ruling out any debt additions is now rising (now 50%, up 4% on last quarter).”

However, there are definitely signs of a recovery. The survey notes 25% of developers indicated they will commence works next month, with 57% of developers saying they will commence in the next six months.

The general assumption taken from these figures is that while development activity is still pegged to pick up over the next year, some businesses look to have delayed projects, with the majority of works likely to commence in 2011.

More than half those works are in New South Wales and Victoria, although Queensland will take 19% of those projects over the next 12 months.

Green-Morgan says the survey demonstrates the commercial property sector will recover later in the year, when investors have easier access to credit and more projects come online.

“Things are definitely down on the occupational side, but we have seen a real pick-up in investment activity and that is continuing into this quarter. We think there are a number of factors involved in the confidence, perhaps due to being June and a low market.”

“But I think that once the election gets out of the way and we move into September, we’re expecting activity to pick up across the board in the commercial sector.”