Australian commercial property market has gone from laggard to leader
Australia has gone from lagging to leading in relation to the rate of recovery in commercial capital values.
Prime office capital values have been rising in most parts of the world since 2009, however growth has varied widely and, perhaps surprisingly, values have increased the least in Australia.
But changes are afoot. Australia has emerged as the slow but steady performer on the world stage – which is one of the key reasons why this market has been such a magnet for offshore investors.
With the rate of capital value growth decelerating in Asia, the US only just limping into recovery and taking into account the changing outlook in Europe, Australia has started to emerge with a more stable, albeit modest, level of capital value growth than other parts of the world.
Indeed, in the third quarter this year, Australia and the US were the equal leaders in relation to quarterly capital value growth after prime office values increased by 1.5%. In the EMEA, which is the epicentre of the world’s economic concerns, capital values grew by just 0.7%, while in Asia values increased by just 1% as cracks began to appear in the region’s economic outlook.
It is a significant shift given what has occurred at a global level since the start of the property market recovery in 2009. Since that time, global capital values have increased 16.7%, driven by strong growth in Asia, where values have jumped a staggering 28.5% on the back of falling cap rates and globe-leading office rental growth.
Even the EMEA and the US have so far managed to post reasonable growth of 15.3% and 13.6% respectively, despite the negative sentiment in relation to their economies.
By comparison, prime office capital values have increased by just 7.5% in Australia in the past two years, despite our enviable credit rating and the fact that foreign investors have been flocking here in record numbers.
And it is a far slower recovery than what has been experienced in past cycles. In the first two years of the recovery in the early 1990s, values increased 12.8% and in the mid-2000s, after the tech wreck, values increased by 11.9% in two years to restore all the value lost in the preceding downturn.
So what’s so different this time round and why has Australia been lagging The cost of debt is one key reason. The level of tenant demand is another.
Unlike most of the rest of the world, the cost of debt has remained relatively high in Australia and this has restricted the local investment market and left the door open to foreign purchasers, who are mostly using all equity when purchasing.
If investors do borrow to purchase, then the spread between the property yield and the cost of debt is too tight to provide much scope for yield of cap rate compression through the bidding process.
On the tenancy front demand outside the resources sector has been hesitant given the uncertain global economic environment and business confidence has remained low, which has slowed decision making.
As a result, Australian prime CBD office rents have grown just 4.0% since the fourth quarter of 2009, which has done little to boost capital values.
But the third-quarter growth numbers point to Australia being the slow but steady performer on the global stage – and this is likely to be a continued magnet for property investors – as is the fact that capital values here need to grow by another 18% to return to pre GFC levels.
The slow and steady pace of change in this cycle in Australia is likely to continue to attract investors comfortable with a more stable recent performance and outlook.
Kevin Stanley is executive director of global research and consulting for the Asia Pacific region at CBRE.
