Australian market overview


Bruce Wan, Global Real Estate Strategist, Macquarie Group
Thursday 01 December 2016

Economy still in expansion, but at a sub-trend pace

The economy continues its long-running expansion in 2015, although growth is running below historical trend. The transition from mining investment to mining output continues, while low interest rates are boosting the most rate-sensitive parts of the domestic economy – particularly housing construction. Meanwhile, the economy is generating jobs growth but not enough to stop the unemployment rate from trending slightly higher. The exchange rate is still depreciating (particularly against the US dollar) providing a much-needed competitiveness boost to manufacturing, farming and tourism.

By region, domestic activity growth is stronger in New South Wales and Victoria and weaker in Queensland and Western Australia, with South Australia and the ACT tracking in the middle. This divergence partly reflects the relative exposures to the firmer conditions in business and financial services, compared to the unwinding in mining and related services.

These economic trends are reflected locally in each real estate market, both residential and commercial.

Commercial markets moving into recovery, investment market strengthens further

In the office market, indicators are turning up more convincingly after slowing in recent years. However, the office market recovery is fairly selective to date. Sydney and Melbourne are performing considerably better than Brisbane and Perth – reflecting the impact of local economic drivers on space demand, rental growth, vacancies and asset prices.

The office supply pipeline is not high by historical standards, considering the major projects currently underway such as Barangaroo in Sydney. A combination of improving demand and moderate supply will drive vacancies lower and rents higher over coming years, more noticeably in Sydney and Melbourne in the near-term.

In the retail market, shopping centre landlords are starting to see some benefits from the uplift in retail spending, through an emerging but modest recovery in store rents. By sector, the most defensive regional malls continue to be popular with investors due to their resilient income profile.

Neighbourhood or grocery-anchored centres continue to gain from the firm pace of population growth. Most of all, bulky goods centres are seeing a stronger recovery, supported by the rapid pace of housing construction and the associated demand for household goods through large format retailers.

Across the board, investor demand for commercial assets continues to strengthen. Foreign investors remain active in the market. They have a strong appetite for all types of prime commercial assets (not just for trophy sites), given the relatively higher yields when compared with more expensive pricing abroad. More recently, domestic capital is returning to the market in force, fuelled by unrelenting inflows into superannuation funds. Consequently, cap rate compression is quickening, as investors progressively drive up pricing in an environment of limited stock availability.

Residential construction booms, while price growth moderates

Residential housing markets are starting to moderate as the pace of price growth and sales volumes both pull back, albeit unevenly.

The house price cycle in Australia is effectively a delayed mortgage rate cycle. Progressive rate cuts since 2011 have triggered robust gains in 2013 and 2014, but this stimulatory impact has been largely realised. The rate cut in early 2015 (with the prospects of more cuts ahead) is likely to extend the price cycle a little further. Looking ahead, the eventual turning point in prices will be determined by the timing and magnitude of increases in mortgage rates.

By region, the Sydney housing market is the standout for this cycle. It has recorded stronger price gains than other capital cities, reflecting population-driven demand and stronger investor interest. Price growth in other housing markets are slowing, with a mix of factors at play including excess apartment supply (Melbourne), moderating mining incomes (Perth) and sluggish underlying demand (Brisbane and Canberra).

Meanwhile, housing construction continues to lift strongly, as developers are encouraged by the low cost of debt and robust selling prices. This cycle, supply additions are far more concentrated in medium- to high-density apartments, particularly in inner-city locations, steadily raising concerns about oversupply within the segment. Certainly, some degree of apartment oversupply is apparent already, as reflected by localised price falls in spot inner-city locations in Melbourne, Brisbane and Perth.

Did you mean [[state.suggestion]]?
Sorry! [[state.errorMessage]]
Sorry! No results found, try different keywords.
If you enjoyed reading this article, why not share it?

Simply copy and paste the text and include a link to the article. Please read the Expertise Articles Terms of Use before sharing.

Would you like to talk to someone?

This material has been prepared by Macquarie Bank Limited ABN 46 008 583 542 AFSL & Australian Credit Licence 237502 ("Macquarie") for general discussion purposes only, without taking into account your personal objectives, financial situation or needs. Before acting on this general information, you must consider its appropriateness having regard to your own objectives, financial situation and needs. The information provided is not intended to replace or serve as a substitute for any accounting, tax or other professional advice, consultation or service.

Except for Macquarie Bank Limited ABN 46 008 583 542 AFSL and Australian Credit Licence 237502 (MBL), any Macquarie entity referred to on this page is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Cth). That entity’s obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that entity, unless noted otherwise.