Perth and Melbourne office markets have the brightest prospects as commercial property sentiment lifts: NAB Index

The Melbourne and Perth office markets are forecast to deliver the strongest returns to commercial property landlords over the next two years with both capital values and rents rising, according to the March quarter NAB Commercial Property survey.

An overall improvement in commercial property sentiment is noted in the report with gains in the office, retail and industrial sub-indexes.

The overall NAB Commercial Property Index rose 9 points in in the March 2013 quarter from -17 to -8 and is forecast to return to positive territory (optimists outnumbering pessimists) in the third quarter of 2013 with strong gains forecast in 2014 and 2015.

Apart from Queensland, where a softer resources market is likely having a negative impact on sentiment in the state, sentiment improved in all states, with the biggest movement in Victoria which is now expected to surpass WA in the next one to two years as the most optimistic state.

Whilst retail property recorded the biggest improvement in sentiment, it remains in negative territory (-27) with CBD hotels the only commercial property sector currently with a positive reading, though sharply down from +58 points in the December 2012 quarter to +6 in the March quarter.

The outlook is brightest for office property with capital values expected to rise by 2.1% by March 2014 and 3.9% by March 2014.

Capital offices values in Victoria – predominantly the Melbourne CBD - are forecast to rise by 2.7% over the next 12 months and then by 4.2% over the following 12 months to March 2015.

Over this two-year time frame, Melbourne office rents are forecast to rise by a cumulative 5%.

In WA, office values – predominantly the Perth CBD – are forecast to rise by 3.5% over the next 12 months and then by 5.6% over the following 12 months to March 2015.

Perth rents are expected to rise by a cumulative 9% over the next two years.

There will also be strong gains in Sydney office values – 2.5% to March 2014 and 4.1% to March 2015 – but rents are expected to fall by 1.4% over the two-year period.

These forecasts are based on the expectations of 300 commercial property agents, developers, fund managers, owners and investors with the report compiled by NAB chief economist Alan Oster together with NAB colleagues Robert De Iure and Dean Pearson.

As the outlook improves, more property developers surveyed reported plans to start new projects or developments in the near-term as fewer property professionals identified debt/equity funding as a problem.

Consumer confidence continues to be noted as the main challenge facing property firms in the next year but concerns about stock availability and the upcoming federal election are also growing.

Other key findings of the report:

• Modest growth in retail capital values to resume in the next two years.
• Gross rents fell in all markets over the quarter but at a slower rate.
• Rents fell most for retail (-1.6%), with the best returns reported for industrial (-0.4%).
• Expectations have strengthened, with industrial rents to grow 0.9% in the next year and 1.9% in the next two years.
• Office rents are tipped to rise 0.4% and 1.5%, while retail rents are predicted to fall -1% and -0.1% in this period.