No recovery in retail property till at least 2015: NAB Commercial property survey

The outlook for the retail property market remains distinctly gloomy with an oversupply of retail property expected to persist until at least 2016 and with capital values and rents still falling, according to the sentiments of 300 property industry participants surveyed by NAB as part of its June quarter commercial property market survey.

The reading of the retail property index was below its long-term average of -25 points in the June quarter and still the weakest segment in the commercial property market.

Retail property market sentiment was negative in all states in the June quarter, except in WA, though it still recorded a drop in state index from 10 to 0 points.

Sentiment improved most in Queensland (up 28 to -5 points) and NSW (up 3 to -26 points) but fell heavily in both Victoria (-50 points) and SA/NT (-50 points).

Sentiment is expected to improve in all states in the next year, led by Queensland (+18 points), WA (+8 points) and NSW (+8 points).

“The retail property market remained subdued in the June quarter with sentiment little changed during the quarter,” says NAB chief economist Alan Oster.

“Despite subdued retail spending, however, it is possible that sentiment may have benefited from the recent depreciation of the Australian dollar and another interest rate cut in May.

“That said, expectations in the retail market were scaled back in the June quarter - a result consistent with the latest readings from the NAB Business Surveys which indicate that retail trading conditions worsened sharply in June while confidence among retailers was negative.

“This suggests that sentiment in retail property markets may continue to flounder in the near-term.

With few signs of turnaround on the horizon, the outlook is not expected to turn positive until June 2015, but still well below the commercial property average. 

The retail outlook is weakest for Victoria, South Australia and Northern Territory and brightest for Queensland, WA and NSW.

Participants in the survey expect that excess supply will be “slowly worked out” and that neutral  conditions - where demand and supply are in synch - are three to five years away.

Over the June quarter, retail property recorded the steepest fall in capital values of 1.5% compared with 0.7% fall in office property values and a 0.5% decline in the industrial sector.

CBD hotels remained the strongest performing sector over the quarter with a 0.3% rise in capital values.

Average capital values for retail property are tipped to fall 0.6% in next 12 months with a very modest rise of 0.3% forecast over the next two years.

The retail property sector also recorded the steepest fall in rents (-2% compared with a 1.2% fall for offices and 0.9% fall for industrial property) as well as the highest level of rental incentives over the quarter.

The steepest fall in rental returns were in Victoria (-2.7%), NSW (-2%), SA/NT (-3.8%) with flat growth in WA.

Average retail rents are expected to fall by -0.3% over the next 2 years (downgraded from 0.1% previously), with property professionals predicting negative income returns for retail property in NSW (-0.9%), SA/NT (-0.8%) and Victoria (-0.6%).

The only partial bright spot for retail property was a tightening in the vacancy rate from 5.4% in the March quarter to 4.8% in the June quarter.

The highest vacancy rates are in Queensland (5.8%) and Victoria (4.8%) with the lowest in WA (3%).

However, retail vacancies are expected to continue climbing over the next year to 5% before easing back to 4.4% by mid-2015.