2020 Vision: What lies ahead for Australia’s property sectors in 2020?

Urban Property Australia offers a preview to some trends we expect to impact the Australian property market over the coming 12 months.

Australian Investment Activity

Urban Property Australia research revealed that the Australian commercial real estate investment market once again remained buoyant last year, with more than $45 billion transacted, for only the third time on record. The office sector was the focus of investors, accounting for almost 60% of the total volume, by far its highest proportion of sales over the past 10 years. In contrast, a lack of investor appetite for retail shopping centres resulted in transactions in the sector falling to seven-year lows.

Urban Property Australia expects another solid year for investment activity in 2020 for the Australian commercial real estate market considering the challenges and concerns that investors consider for other parts of the world, namely the US-China trade relationship, the upcoming US presidential election and Hong Kong economy.

Australian Office Market

With more than 250,000 jobs created over 2019 of which most were white-collar, tenants continue to need to expand despite the subdued economic conditions. Employment conditions are expected to be supported in the short term by the low interest rate environment and ongoing investment in infrastructure projects.

With the vacancy rate of the Melbourne CBD office market down to 30-year lows, Sydney CBD vacancy below 5%, UPA forecasts that vacancy to remain low with the vast majority of new supply already pre-committed. We also expect the vacancy rates of both Perth CBD and Brisbane CBD to continue to improve through 2020 boosted by improving local economic conditions.

Although bond rates have fallen, UPA expects that yields will remain at their historical lows as investors become increasingly cautious of the length of this current cycle, despite the strong rental growth.

Australian Industrial Market

Driven by growing e-commerce sales and occupiers increasingly focused on their industrial facilities, demand has outstripped supply, driving vacancy down to three-year lows. With vacancy low but occupier demand still robust, Urban Property Australia expects that industrial rents will grow strongly in 2020.

On the back of these low vacancy rates and persisting strong tenant demand, new supply is projected to lift in 2020, boosted by an increasing level of speculative development. Driven by increasing consumer demands and land prices exponentially growing, Urban Property also expects to see multi-story industrial facilities (a first in Australia) to be developed in 2020.

Although transactional volume fell last year, industrial property remains one of the most favoured asset classes leading to strongest yield compression of all property sectors over 2019. Urban Property Australia expects yield compression to continue for the industrial sector as the investors continue to compete for on a diminishing pool of assets on offer.

Australian Retail Market

2019 was a brutal year for the retail market; despite interest rate cuts – store closures, retailer insolvencies and changing consumer behaviours have impacted both occupiers and investors alike. The challenging retail trade conditions and subdued investor sentiment has led retail shopping centre yields to rise. UPA expects the trend of yield decompression to continue through 2020 especially for regional and sub-regional centres. While vacancy remains elevated along suburban retail strips, values remain relatively resilient with robust purchaser demand from private investors.

UPA expects that further retailer closures and subdued trade conditions will see limited new supply for the retail market in 2020. We expect owners instead to be focused on re-positioning and add more non-traditional retail occupiers such as gyms, medical centres and co-working space to centres. Rents in the retail sector are projected to continue to decline across retail asset classes and states with retailers cautious and increasingly selective towards new tenancies.

Australian Residential Market

2019 was a tale of two halves for the Australian residential market with a strong finish of the year. Since the May 2019 federal election result; prices, access to finance, approvals and sentiment all rose. While prices remain below their previous highs; prices in both Sydney and Melbourne have generally risen by 5% through 2019. Looking into 2020, Urban Property Australis expect that prices will continue to recover as population growth continues to outpace new supply which was constrained by tight development financing.

With demand for housing remaining healthy, UPA expects the emergence of the build-to-rent (BTR) sector over 2020. With lingering purchaser concerns about cladding, cracking and developer insolvencies, BTR offers a solution to increase quality residential stock to the market at a time when vacancy rates below 3% across most of Australia’s capital cities. Despite the low vacancy rates, rents are expected remain relatively steady with weak wages growth.

Global and Australian Economy

Global economic growth should pick up this year as the trade deal between China and the US has diminished concerns of a severe downturn.

While Australia is likely to have its 29th year of uninterrupted economic growth in 2020, with strong infrastructure spending and population growth, the bushfires are likely to impact the economy over the first half of the year.

Urban Property Australia expects the RBA to cut the cash rate to 0.5% in coming months and lower it to 0.25% by mid-2020 which will be maintained for an extended time.

Victoria is projected to continue to outperform other Australian states in 2020, followed by Queensland which has seen in population growth leading to solid economic growth. On the back of record profits, mining investment is expected to grow for the first time since 2013 this year, which will aid the recovery of Western Australia in particular.

Regards, Sam Tamblyn

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