Raine and Horne Commercial

3 | INSIGHTS SPRING 2018 The changing sentiment towards residential property has meant that commercial real estate is even more popular than it was last year. Although a change in residential property sentiment is one driver of buyer demand, commercial property is also being supported by improved leasing conditions, and in many markets, jobs growth is occurring and leading to demand for more space. Right now, Australian commercial property is well sought after by both buyers and tenants. The property types most in demand from buyers are office, industrial and hotels. All of these are seeing declining vacancy rates, supported by a range of factors including business expansion, growing online retailing and increasing tourism numbers. The Sydney CBD office market now has the lowest vacancy rate in 10 years, while Parrama a has the lowest vacancy in Australia. Over the next 12 months, all these factors, which have led to high demand for these property types, are expected to continue. These strong market conditions also mean that access to finance is generally not as restrictive as it is for some other property types. While the Financial Services Royal Commission is leading to greater restrictions to finance across all types of purchases, there continue to be some areas that are easier to obtain finance for than others. Demand for development sites was red hot up until last year, and right now, the market has cooled significantly. Part of this is due to the changing sentiment towards residential, but a drop in investor activity and fewer pre- commitments for new builds is also a problem. Chinese developers have also staged a pullback from building in Australia, driven by government restrictions in China. Shopping centres and strip retail are the property types causing the most concern as we head further into the new financial year, primarily due to the entry of Amazon into the Australian market. To put things into perspective, Amazon’s sales in Australia are at present about the same as one sub-regional shopping centre, so the online giant isn’t yet having a major impact. It is, however, early days and if the impacts in Australia shadow what’s happening in the US, then Amazon’s presence will lead to higher vacancies, particularly in poorer performing centres. Regardless of how Amazon performs, it will be the best, well-managed centres that continue to thrive. Australia’s population is growing, and strict planning controls mean that oversupply of shopping centres has rarely been a problem. In 2019, the completion of the Financial Services Royal Commission will have the most positive impact on all property types, providing greater certainty around lending. For commercial property, continual employment growth will be the biggest factor driving tenant demand – well-leased buildings experiencing rental growth are popular with investors. For now, the challenges being experienced by residential property are certainly not flowing through to commercial property. Commercial Property Outlook Continues to be bright Nerida Conisbee REA Group Chief Economist COMMERCIAL MARKETS | Overview