Executive Summary

Global economic conditions remain robust. While growth has eased in some economies, in the United States the recent fiscal stimulus has contributed to a further strengthening in growth. The trade tensions between China and the US have however escalated over recent months and represent a downside risk to the global economy in coming years. Growth is expected to remain above average in most of Australia’s trading partners, although the uncertainty generated by the trade disputes appear to be affecting investment decisions in some economies.

Australia’s economy slowed sharply in the September 2018 quarter, growing at the weakest pace in two years. The economy grew by 2.8% over the year, down from 3.1% in the prior 12 months.

Household consumption growth– the largest part of the economy at over 50% — was weak, driven by soft spending on discretionary items despite being partially offset by strong government investment. Public investment remained at high levels with continued work on a number of large infrastructure projects around the nation. Given the downturn in the housing market and the tighter credit conditions, Australian economic growth is expected to moderate further in 2019. With economic growth projected to be at trend levels and inflation still steady, Urban Property Australia expects that the cash rate will remain on hold through 2019.

With the financial services royal commission having now closed its seventh round of hearings in November it is expected that the royal commission will hand down its final report to the Governor-General by 1 February 2019. The findings of the royal commission will drive unprecedented change across Australia’s finance sector.

One likely outcome is that banks will unable to both manufacture financial products and purport to provide independent advice about their purchase in the future with many banks already in the process to sell advice arms. Another potential outcome of the commission will be tougher regulation across the financial industry by APRA, ASIC and the RBA.

Reflecting Australia’s record employment growth over the past five years, Australia’s total office vacancy rate fell to 9.1% as at July 2018, with falls recorded in every major CBD office market. The total vacancy rate for the Australian office market has now fallen to its lowest level since January 2013. With Melbourne and Sydney CBD office vacancy rates down to 10-year lows coupled with strong employment gains, both markets have recorded double digit rental growth with limited new supply until 2020. Supported by declining vacancies and rising rents, transactional volumes across Australia’s office markets is set to record its third highest annual total ever.

In 2018 to date Urban Property Australia has recorded more than $15 billion of office properties transacted. While most transactions were CBD-based assets, increasingly investors are exploring other markets in search for yield and opportunities with 45% of all office transactions outside CBD locations.

The Australian retail property sector has continued to perform well over 2018, despite challenging retail trade conditions. Although the retail market has been supported by a growing population and strong employment conditions much of the consumer spending is rising on the back of declining household saving which appears now to be plateauing. In 2018 for the first year in many years, Urban Property Australia is now witnessing a decompression of retail property yields, particularly those more exposed to the discretionary retail sectors and in secondary locations. Looking ahead with e-commerce expected to continue to increase, impacting rental growth, yields for retail property will continue to be under upward pressure to rise as cost of debt increases.

The continued demand for industrial space is being driven by the massive investment program in infrastructure across the country. Public infrastructure spending has increased by 4.6% over the year.

More importantly though, investment in transportation projects has surged substantially over the past few years and is expected to accelerate over the next five years with the amount of work to be done still enormous.

In addition, the Federal government recently announced a further $24.5 billion funding package for transport infrastructure projects, forming part of the Government’s $75 billion transport infrastructure investment over the next decade.

With consumers demanding more than ever faster delivery time at minimised or no delivery costs, industrial tenant demand for last mile logistic facilities located within infill markets supported larger regional distribution centres on peripheral locations has surged. With online retail sales forecast to reach $40 billion by 2023 up from the current $28 billion levels, demand for industrial property from occupiers and investors alike will remain robust for the medium term.


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