Offices, business hotels and bulky goods stores to lead next commercial property investment upswing: BIS Shrapnel

The next upswing in the commercial and industrial property market is expected to commence this financial year led by a new wave of office and hotel construction, according to BIS Shrapnel.

While retail construction is expected to  remain weak, investment in bulky good stores spurred on by the competition between DIY store expansions (Wesfarmers’ Bunnings and Woolworths' Masters) will continue, while suburban malls with a strong supermarket presence will also be the focus of new investment.

BIS Shrapnel forecasts – non-residential commencements by sector

Across commercial property, the research firm is forecasting a 6% rise in building commencements in the next financial year after no growth 2011-12 as part of a “prolonged upswing” for the sector.

However, in its Spring 2012 Forecasts, BIS Shrapnel warns that businesses will remain wary about committing to new developments “even as undersupplies in some markets become increasingly evident”.

BIS Shrapnel is forecasting office starts to lift by 13% to $5.17 billion in 2012-13 as the national office market tightens over the next few years. This follows an estimated 4% rise in office commencements to $4.39 billion in 2011-12.

“While the current economic climate is volatile gradual growth is expected which will flow through positively to employment.

“At the same time, the rate of completions will persist at a low level, limiting additional supply. As this occurs effective rents and prices will rise and supply will react in most markets," says BIS Shrapnel.

New building construction in the accommodation sector is estimated to have risen by 21% over 2011-12 to just under $1 billion, and BIS Shrapnel is tipping a 43% surge to $1.35 billion in 2012-13.

“A gradually strengthening global economy will provide support for accommodation demand from both tourists and business, while the addition to room supply will remain constrained given weaken construction volumes over recent years – pushing up room rates and occupancy levels further, encouraging development," says BIS Shrapnel.

“It is noted that while the more business focused CBD markets look relatively healthy, conditions for tourism-focused operators remain tougher, especially in markets like the Gold Coat and borth Queensland,” says BIS Shrapnel.

Retail building is expected to remain weak in 2012-13, with BIS Shrapnel saying that the weaker economy and competition from online retailers has resulted in weaker trading results, meaning that the expansion plans of many retailers and shopping centres developers are on hold.

Despite an expected improvement in economic conditions, the flow-through effect on new shopping centre construction will take time.

Investors wanting to take a punt in the retail space should consider bulky good centres and neighbouring shopping centres, says BIS Shrapnel.

“Bulky goods centres and neighbourhood shopping centres building has outperformed and this is anticipated to continue for the near future.

“This reflects the relatively aggressive expansion plans including ALDI, Woolworths (especially with their new Masters hardware chain), Wesfarmers and Costco."

A sustained commercial property recovery is also tipped by ANZ in its September property outlook update following the sector "plateauing" in 2012.

“Market fundamentals still suggest the broader ex-retail commercial property market is at the early stages of a multi-year cyclical upswing.

“Low vacancy and restricted supply present considerable upside to effective rents, particularly in the office and industrial sectors. Moreover, current yields belie the positive fundamentals and will firm as investor sentiment rebounds,” says ANZ in its report, authored by its head of property research Paul Braddick and other ANZ economists.