Australia's property markets to continue to attract overseas and local interest in 2012-13

In the past 12 months our property sector has been defined by the two-speed nature of the Australian economy, and this will continue to present challenges in the year ahead. 

The gap between the mining states of Queensland and Western Australia and the rest is not likely to shrink any time soon. Notwithstanding the disparity between the regions, the growth from the mining and resources sector will continue to stimulate the broader Australian economy, as evidenced by our national unemployment rate of 5.1%. 

Similarly, global economic conditions will continue to fluctuate. A spin-off from this international instability, however, is that Australia’s economic performance is comparatively strong, which should drive continued investment in our property market from overseas. 

Offshore investors have committed about $3.7 billion in Australian property markets in just the past six months, and local investors are also becoming more active, with pension funds looking to increase their allocations to commercial property. 

Investors will remain cautious, with forecasts suggesting the weight of capital chasing quality assets will lead to a further tightening of premium and A-grade yields by as much as 25 basis points in the next six months. The secondary-grade market is expected to continue to experience a softening of yields in the months ahead, as investors’ appetite for risk remains soft and owners place more assets on the market as funding pressures increase. 

Despite this, opportunistic buyers will continue to target underperforming assets in order to reposition and take advantage of the potential future upside. 

Foreign investment from sovereign wealth funds, pension funds and REITS, particularly from Asia, is forecast to remain high as investors chase secure yields of between 6.5% and 7.5% in Sydney, compared with 4% to 6% returns in Hong Kong, Singapore, London or New York. 

For the first half of the new financial year, we expect an increasing battle for core and core plus assets across all asset classes. 

Office markets across the board are performing relatively well, however the current weakness in the finance and insurance sector will continue to impact upon the performance of Sydney’s office leasing markets. As a result, below average absorption levels are expected to continue into the first half of 2013. 

A shot in the arm for the Sydney market is the recent pre-commitment of more than 120,000 square metres of space at the anticipated $6 billion Barangaroo redevelopment to anchor tenants Westpac, KPMG and Lend Lease, with Colliers International integral in these negotiations. This announcement will stimulate activity throughout the Sydney CBD and do wonders for the market. 

In the wider retail sphere, the going is tough. While household spending has been rising, expenditure in the traditional retail sector has been lagging other areas of consumption. 

With continued short-term pressure on the sustainability of occupancy costs, property owners will be focusing on tenancy mix and maintaining occupancy levels in their shopping centres, with growth in specialty rents limited. The stability of retail property, however, remains an attractive proposition for many investors as they look beyond the current challenges being experienced in the broader retail sector. 

The other well-documented concern for the retail sector is the rise of online shopping and, while this presents an ongoing challenge for the sector overall, it also has repercussions for other property sectors, particularly industrial. 

Global growth in container imports has driven logistics activities to the forefront of industrial real estate over the past decade and this will continue in the year ahead. 

In the next 12 months the Australian industrial market is likely to go through a phase of steady improvement, with signs of continuing strong leasing and investor demand for quality industrial space. A lack of available land and built products will continue to impact upon key industrial markets. 

Lending requirements for developers seeking to construct new residential projects will remain constrained, as they have since the global financial crisis, resulting in waning new supply levels declining since 2009. These factors have translated into tight vacancy rates, rising weekly rents for investment stock and stable median prices within Australia’s residential property market. 

However, the Australian residential market continues to perform strongly when compared to major global markets, and we believe persistent demand for residential dwellings will continue unabated due to positive net overseas migration levels and natural increase coupled with declining supply levels.

John Marasco is managing director of investment services at Colliers International