Property Market Insights as at December 2017 | Trilogy Funds Australia

Property Market Insights as at December 2017

Residential

Residential markets were steady in November, according to data from Corelogic1, with no change to dwelling values recorded in the national aggregate.

Capital city market values fell 0.1%, driven down by a 0.7% fall in Sydney but offset by a 0.2% increase in regional markets.

Melbourne led the charge for the larger capital cities, recording 0.5% price growth. However, Canberra and Hobart continue to set the pace, with values increasing by 0.9% and 0.6% respectively.

Brisbane continued its pattern of stable but slow growth, recording a small increase of 0.1% in November. Quarterly figures looked more positive, showing an increase of 0.6%.

Weakness in the Sydney market showed a negative trend, with dwelling values in the harbour city down 1.3% on the previous quarter.

Darwin also saw consistent decline, recording a 0.4% drop over November and an annual change of 5.5%.

Data for Perth this month indicated that the city’s property values may have already hit the floor, edging up 0.3% over the quarter. This is the first quarter of growth for Perth in three years.

The Reserve Bank of Australia (RBA) has decided to put interest rates on hold for a 16th consecutive month2, with the cash rate remaining at 1.5%. However, despite the continuing affordability of mortgage debt, the tightening of macroprudential standards by both the central bank and APRA have well and truly started to bite, particularly in the now more subdued Sydney market. Tightening of lending standards has seen interest-only loans fall from 44.84% of new loans in the June quarter to just 16.91% in November. This represents a $13.5 billion dollar drop in the value of new interest-only loans3.

Commercial

The RBA has also warned sectors at risk in the property market are not only confined to the residential sector, with low interest rates driving possibly unsustainable price growth in commercial property4. In a story which is similar to that in the industrial sector, foreign investment is driving growth as strengthened domestic lending standards put the brakes on local demand.

Colliers have predicted that the demand for flexible work spaces, co-working spaces, shared amenities and placemaking features will drive change in the office market in 20185. The trend towards greater flexibility may put pressure on vacancy rates, as offices consolidate space, businesses share facilities and expand their off-site workforces, although business growth could offset this trend.

In addition, the entry of online retailer Amazon into the Australian market is the latest in a long line of pressures on the domestic retail sector6. Following a year of high profile insolvencies, the entry of the international juggernaut may force further declines in the sector, putting pressure on retail leasing rates. Risks exist for both smaller players and for the larger retailers such as JB Hi-Fi, Myer, David Jones. However, early signs indicate that while Amazon is highly competitive on price in some sectors, it is not undercutting local suppliers across the board.

Despite risks in the sector, the RBA’s decision to again put interest rates on hold will ensure that cheap finance continues to be available for those looking to invest in commercial and retail property.

Industrial

While the entry of Amazon into the Australian market represents a threat to local retailers, it is the opposite story for industrial property owners. With Amazon requiring significant industrial space for its warehousing and logistics requirements, industrial transactions reached historic highs in the first three quarters of 2017.

According to JLL, 1.7 million square metres of space was leased in the first three quarters of the year, about the average amount of space leased over an entire year in the sector7. Amazon itself has acquired 2.11 hectares of land in Sydney, adjoining a warehouse it currently leases from Goodman Group8.

The expansion of e-commerce in Australia has also seen spare industrial capacity being leased by third-party logistics firms, such as DHL. This could see the reversal of the trend of rezoning industrial land for residential development, as demand surges for industrial space.

The re-election of the Palaszczuk Labor Government in Queensland has assured the future of one of south east Queensland’s largest projects, with Cross River Rail now on track for delivery.

While this will have an important impact on passenger rail in the river city in the years to come, an additional river crossing will also free up capacity in the network for further freight rail. With Cross River Rail, a $10bn inland rail project, that consists of a 1700km railway line between Brisbane and Melbourne, Brisbane is set to expand its freight rail capacity significantly in the coming years.

Stay tuned for next quarter’s insights!

Sources:

[1] https://www.corelogic.com.au/news/national-dwelling-values-hold-steady-november-sydney-trending-lower-while-perth-bottoms-out#.Widg3EqWaUk

[2] https://finance.nine.com.au/2017/12/05/14/17/december-interest-rates-decision-2017

[3] https://www.realestate.com.au/news/new-data-shows-record-13b-fall-in-interestonly-home-loans/

[4] http://www.theaustralian.com.au/business/property/commercial-property-risks-rising-warns-rba/news-story/09a7ee6ce02532f2116e69e38f0d3129

[5] https://indd.adobe.com/view/a607fe81-059f-44d3-a835-18fdeb4f5355

[6] https://www.choice.com.au/shopping/online-shopping/buying-online/articles/amazon-enters-australia-next-day-delivery-051217

[7] http://www.smh.com.au/business/property/industrial-property-landlords-preparing-for-amazon-impact-20171121-gzpr7f.html

[8] http://www.smh.com.au/business/property/amazon-shores-up-property-as-it-prepares-to-launch-20171122-gzqjzf.html