Confidence in future recovery waning
Sentiment in the Australian commercial property market dropped sharply amid softening economic conditions in the June quarter, according to the latest NAB Commercial Property Index.
The index fell to -11 points, a below-average reading, after reporting positive sentiment for the first time in two years in the previous quarter.
“While sentiment fell across the board, the industrial and CBD hotel sectors showed resilience with sentiment at +41 and +25 points, respectively,” said Alan Oster (pictured above), group chief economist at National Australia Bank.
In contrast, retail property sentiment was notably weak, declining to -39 points, while office property also saw negative sentiment at -25 points.
The NAB report also indicated a decline in confidence about future market conditions. The 12-month confidence measure dropped to +9 points, while longer-term confidence fell to +22 points — both below average.
“Property professionals are adjusting their expectations, now anticipating a weaker market recovery than previously thought,” Oster said.
Sentiment and confidence were down across all states except Western Australia, with Victoria emerging as the clear underperformer, particularly in the office and retail sectors.
Looking ahead, the survey revealed expectations of falling capital values in the retail and office sectors over the next one to two years. However, growth is anticipated for CBD hotels and industrial properties, with the strongest 12-month outlook for CBD hotels at 2.3%. Industrial property values are expected to rise by 1.7%, though this is a more modest expectation compared to previous surveys.
Office vacancy rates reached a survey high of 11.2% during the quarter, with the highest rates recorded in Western Australia at 13.9%.
“The oversupply in office space is persistent, and vacancy rates are expected to decline only slowly over the next couple of years,” Oster said.
Industrial vacancy remained low at 2.9%, though it is expected to rise slightly as demand normalises and additional space becomes available.
The outlook for rent growth remains positive in the industrial sector, with rents expected to grow by 2.8% over the next year and 3.1% in the following year. Queensland is expected to outperform the broader market with anticipated growth of 3.6% and 4.3% over the next one to two years.
Office rents, however, are forecasted to decline by 0.6% in the next year before showing modest growth of 0.3% in two years. Retail rents are expected to fall by 0.8% over the next year and by 0.3% in the following year, with Western Australia being the only state expected to see positive rent growth in this sector.
Perceptions of debt funding access remained unchanged in the second quarter, with a net balance of -24% of property professionals reporting it was more difficult to obtain debt funding. Expectations for the next three to six months, however, have worsened, with the net balance increasing to -17%. Access to equity funding is still seen as easier than debt, but the net balance indicating difficulty rose slightly to -20% in the second quarter.
The survey also showed a stable pre-commitment level for meeting external debt funding requirements for new residential developments at 56%, while pre-commitments for commercial property developments increased to 59%. However, more respondents expect funding requirements to worsen in the coming months, reflecting concerns about the broader economic environment.
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