Australia’s residential markets may be suffering right now but the commercial sector is powering ahead.
What’s behind the surge and will it take the residential sector with it?
Mark Wizel, national director at real estate investment firm CBRE, analysed the commercial real estate market for us on Auction Day, revealing whether its performance is a precursor of things to come for residential real estate.
Despite concern over wages growth and some headwinds in the residential real estate sector, the national and state economies are performing well, Wizel said.
Population growth and infrastructure spending are likely to continue being key economic drivers this year.
This has meant commercial real estate performance over the last 12 months has been quite strong, Wizel said. Investment in retail last year was down on 2017 but still at a very healthy $9.4 billion in 2018.
What drives the commercial real estate market?
Wizel said a combination of factors continue to drive commercial real estate, including strong investor demand and tight supply.
Australia has a reputation as a safe haven for investors, which has attracted foreign investment particularly from Asia, Wizel said.
Overseas investors, unlike local investors, aren’t so driven by sentiment. They look at the fundamentals in the commercial real estate space, which are based on things like population growth, and believe the commercial market is a good place to invest.
“They are seeing an opportunity to get into that space and fill the void of what the big Australian banks have left post royal commission,” Wizel said.
Asian developers, who entered various parts of the Australian market from 2009 to 2014, are now shifting into investment or land banking opportunities as opposed to developments.
“Development sites are not trading anywhere near the ferocity we saw in 2015, 2016 and parts of 2017.
“Unfortunately that’s probably an indicator that we’ve probably got a way to go in that residential market picking up steam again,” Wizel said.
The availability of debt and the attractive pricing of that debt is another factor making Australian commercial real estate a smart investment.
“We are seeing a lot of non-traditional bank lenders enter the market and have a real willingness to work with investors and work with developers in the Australian markets.
“That’s ultimately what’s driving the confidence and the strong activity,” Wizel said.
Wizel rejected the thought that upcoming state and federal elections in Australia would make foreign investors feel jittery.
“Over the past 4 or 5 years, when it comes to Asian investment coming into the country, the election has nothing to do with the ferocity with which they look to attack the property market.
“A lot of the Asian groups, whether they are Malaysian, Singaporean, Hong Kong or Mainland Chinese, they see the Australian political landscape as quite steady,” Wizel said.
What does it mean for residential real estate?
Just like the commercial market is driven by general economic factors like population growth and infrastructure spending, so is the residential development and domestic residential markets.
But while the residential sector overall is driven by the same key drivers of the commercial markets, Wizel said there are some factors unique to the residential sector that determine the rate and depth of the current residential market decline and the timing and speed of its recovery.
Wizel said the residential market is “ahead of the game” in terms of market cycles, having peaked at some point across the different geographical markets over the last 12 to 24 months.
The good news?
Multi-billion dollar infrastructure investments by the Victorian and NSW governments into road and rail projects will underpin economic growth in those states for the next few years, Wizel said.
He predicted these developments will counteract, to some degree, the downturn in residential construction. A newly emerging mining revival will also give a boost to WA and Queensland housing markets.
Wizel’s forecast for the residential development market for the rest of the year is it will continue to face challenges, with more stock likely to be sold off and investors focusing on office developments.
Recent commercial real estate sales
There is a new evolving trend of Asian capital away shifting away from immediate development and more into established commercial sites as they sit and watch to see what happens in the market while having some skin in the game.
509 St Kilda Road
The sale of a St Kilda Rd office block in Melbourne smashed the leafy boulevard’s record by almost $20 million after an eye-watering $163 million sale.
It was sold to a mainland Chinese investor and illustrates the trend Wizel identified of Chinese developers shifting over into the investment landscape.
“Here it was effectively a Chinese developer who had done a number of projects in Melbourne and Sydney.
“They said they might just put the brakes on the developing for the time being but we still want to keep the money in the country. And they came out and bought that commercial office building for $160 plus million.”
A Chinese-backed land banker and developer swooped on an Abbotsford industrial site, buying an IKEA-leased warehouse for $17.3 million. It is an example of what Wizel called a “longer-term land-bank play”.
Source: Azal Khan