Commo: What lies ahead for Australia’s commercial sector in 2020?

Published by Commo, 28/1/2020

Urban Property Australia offers a preview to some trends it expects to impact the Australian commercial property market over the coming 12 months.

Urban Property Australia has predicted another strong year of invest in the Australian commercial sector, citing overseas challenges such as US-China trade relationship and the upcoming US presidential election as reasons why investors may turn their attention to the country’s market.

Research from UPA revealed Australian commercial real estate investment market remained buoyant last year, with more than $45 billion transacted for only the third time on record.

According to UPA, the office sector was the focus of investors, accounting for almost 60 per cent of the total volume, by far its highest proportion of sales over the past 10 years.

In contrast, a lack of investor appetite for retail shopping centres resulted in transactions in the sector falling to seven-year lows.

Below is UPA Managing Director Sam Tamblyn’s commercial forecast for the year ahead.

Global and Australian Economy 

Global economic growth should pick up this year as the trade deal between China and the US has diminished concerns of a severe downturn.

While Australia is likely to have its 29th year of uninterrupted economic growth in 2020, with strong infrastructure spending and population growth, the bushfires are likely to impact the economy over the first half of the year.

Related: Australian commercial property volume shaping up to be ‘lowest since 2012’ – Urban Property Australia

Urban Property Australia expects the RBA to cut the cash rate to 0.5 per cent in coming months and lower it to 0.25 per cent by mid-2020 which will be maintained for an extended time.

Victoria is projected to continue to outperform other Australian states in 2020, followed by Queensland which has seen in population growth leading to solid economic growth.

On the back of record profits, mining investment is expected to grow for the first time since 2013 this year, which will aid the recovery of Western Australia in particular.

Office market

With more than 250,000 jobs created over 2019 of which most were white-collar, tenants continue to need to expand despite the subdued economic conditions.

Employment conditions are expected to be supported in the short term by the low-interest rate environment and ongoing investment in infrastructure projects.

With the vacancy rate of the Melbourne CBD office market down to 30-year lows, Sydney CBD vacancy below 5 per cent, UPA forecasts that vacancy to remain low with the vast majority of new supply already pre-committed.

We also expect the vacancy rates of both Perth CBD and Brisbane CBD to continue to improve through 2020 boosted by improving local economic conditions.

Although bond rates have fallen, UPA expects that yields will remain at their historical lows as investors become increasingly cautious of the length of this current cycle, despite the strong rental growth.

Related: Solid’ investment expected to continue this year, says Urban Property Australia

Retail market 

The past year was a brutal one for the retail market, with interest rate cuts failing to halt store closures, retailer insolvencies and changing consumer behaviours that impacted both occupiers and investors.

The challenging retail trade conditions and subdued investor sentiment has led retail shopping centre yields to rise.

UPA expects the trend of yield decompression to continue through 2020, especially for regional and sub-regional centres.

While vacancy remains elevated along suburban retail strips, values remain relatively resilient with robust purchaser demand from private investors.

UPA expects that further retailer closures and subdued trade conditions will see limited new supply for the retail market in 2020.

We expect owners instead to be focused on re-positioning and add more non-traditional retail occupiers such as gyms, medical centres and co-working space to centres.

Rents in the retail sector are projected to continue to decline across retail asset classes and states with retailers cautious and increasingly selective towards new tenancies.

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