NAB quarterly commercial property survey shows confidence still strong but declining

The NAB Commercial Property Index fell 4 points to +17 in Q2 but remains 14 points above its long-term average of +3.

State indices declined across the country, except in VIC.

Sector indices for CBD hotels, office and industrial property converged in Q2, but remain much lower for retail.

CBD hotels eased despite solid occupancy and a favourable tourism outlook.

Office and industrial indices also fell - even with positive lead indicators in office and online and warehousing demand for industrial.

Retail better (but negative) as subdued retail business conditions and slow wages growth hurt consumer sentiment.

Confidence was largely unchanged in VIC and QLD, but slightly weaker in NSW.

SA/NT was the least confident by some margin (and in all sectors), with WA also trailing.

Confidence fell most in CBD hotels (from high levels) but is still highest overall.

Industrial also lower and now on par with office after out-performing in Q1.

Office changed very little, with sector benefiting from demand in key states and nascent signs of recovery in under performing states.

Retail improved a little, but is still negative and weakest of all sectors. 

Expectations for capital growth in the next one to two years are strongest for office property at 1.6% & 1.7% (replacing CBD Hotels), with VIC & NSW leading the way.

They are weakest for retail (-0.8% & -0.7%), with values tipped to fall or stay flat in all states. 

National office vacancy fell to 8.5% in Q2 (9.0% in Q1) - lowest since Q4’15. Despite small increases in VIC and NSW, they remain the tightest markets for space.

Vacancy also fell further in QLD (lowest level in 4 years) and looks to have stabilised in SA/NT and WA. 

Office property also expected to lead way for rental growth in the next-12 years (1.5% & 2.0), followed by industrial (1.2% & 2.1%), with NSW and VIC out-performing in both markets.

In retail, the outlook is for rents to continue falling.

This quarter NAB asked property professionals for their take on the RBA and around two in three property professionals think next RBA move on rates will be up.

Only 4% see a cut and 23% no change while most (53%) believe next move will occur in six-12 months (NAB’s view (up) also sits in six-12 month range but at latter end).

If rates continue rising in medium to longterm, 18% think it will cause property values to fall over 10% and 51% less than 10%. 

Less than one in 10 (9%) property professionals use interest rate hedging to mitigate risk and almost six in 10 (59%) said they did not hedge and did not expect to do so in the future. 

When asked how their view on rates was impacting their hedging decision, 44% said they did not intend to change their position.

But 36% planned to increase the amount of hedging and 11% would increase the length of interest rate hedging. 

Despite a cooling housing market, a survey high 65% of developers starting new projects are still targeting residential development. 

The recent improvement in accessing funds has reversed in Q2.

In net terms, -29% said it was harder to obtain loans (-21% in Q1) and -16% equity (-14% in Q1).

More property professionals now also expect funding conditions to worsen in next six-12 months.