Business conditions in the commercial property market continued to improve during the September quarter, fuelled by higher levels of activity in the office and hotel sectors, according to the latest NAB Commercial Property Survey.
However, the survey also found the retail and industrial markets will remain weak as consumers are frugal, and indicators suggest access to funding has also become more of a challenge.
The Commercial Property Index rose by 15 points to a total of five points, with the gains driven by the office and hotel sectors, which improved by 17 and 13 points respectively. The recovery in hotels is also a marked improvement, as this was the weakest category in the previous survey, with NAB noting that “expectations around room rates have been sharply revised upwards”.
But conditions are still weak in the retail sector, whose index decreased by four points, while industrial markets also recorded a 10-point decline.
And there are several other problems facing developers, holding them back from making a marked improvement in business. One of the most significant of these is property development times, which the survey found are increasing.
“Developers report that they are further delaying new projects, with the share of respondents reporting new developments occurring in the next six months declining from around 79% in our June survey to 57% in September.”
Capital values are highest for office markets, currently at 0%, up from -0.4% during June. This sector also has the strongest outlook, with growth of 3.1% pinned by September 2011. Victoria is expected to record the highest growth at 5%, and New South Wales at 3.8%.
But capital values are still weak for the retail and industrial markets, down by 0.7% for each. Levels will return to normal within six months, the survey found, with growth of 0.9% for retail and 0.4% for industrial by September 2011.
The survey has also found more developers are having problems finding debt, which the survey says is becoming “considerably more challenging”.
A net balance of 34% of respondents found acquiring debt has become more difficult, up from 27% in the June quarter. And about 26% say they are anticipating more difficult debt conditions for the December quarter.
“NAB’s Monthly Business Survey confirms that access to credit is considerably more challenging for the construction industry than the broader economy at present.”
The survey also notes access to equity is expected to remain difficult, with a net balance of 21% of respondents expecting difficulties.
And rising interest rates are also set to hit the market hard, with 24% saying rising rates are the greatest concern for their business, with another 24% nominating access to finance as their biggest problem.
The RBA is expected to raise rates at its meeting on Melbourne Cup Day.
The weak consumer retail market is also impacting property buyers, with the survey noting that, “consumer confidence was also perceived as a negative for property firms – with 15% of respondents noting this option, up from around 8% in June”.
By far, Victoria has remained the strongest market with an index of 28 parts. The strength in the state is being led by the office markets, while industrial activity is also stronger than the other states.
In comparison, Queensland has recorded an index of negative 27 points, with the retail and office markets recording the weakest results.
The survey notes retailers are still experiencing a downturn, along with retail operators, as consumer spending remains modest, “particularly for discretionary items, such as household goods”.
“Our survey respondents suggest that at a national level, retail property will remain weak until the second half of next year, with only a very modest upswing anticipated in September 2011.”
“Over the next 12 months, the strongest improvements in the retail property cycle are expected in Western Australia – the state benefiting most strongly from the mining driven economic growth – with respondents anticipating a moderate upswing.”
Melbourne remains strongest retail market, with conditions classified by respondents as “good”. But over the next six months, those conditions are set to move back to only “fair” as the retail market remains tight.
For the industrial sector, activity weakened during the September quarter, with the weakest markets found in New South Wales and Queensland.
“At a national level, respondents see a weaker outlook for the sector, with the recovery in conditions shifting out by a quarter to September 2011, when a very mild upswing is expected.”
“All markets are anticipated to recover by this period, with minimal deviation between individual states. Western Australia is nominally the strongest – with respondents anticipating a very mild upswing – while Queensland is the weakest, with essentially neutral conditions expected.”
Melbourne was the only market to record a “good” rating for the industrial sector, “and it should be noted that it only just reaches this category”. All other cities reached a “fair” rating.
But confidence is also set to increase over the next year. The index found six-month expectations have increased for all four sectors compared to the June survey, with expectations also high for the 12-month outlooks, when performance expectations for the index are all in positive figures.
Patrick Stafford is a freelance journalist and a former deputy editor of SmartCompany.
