Commercial property values fall as rates bite

Australian commercial property prices fell in the industrial and office sectors in the December quarter, but industry players are cautiously optimistic values will rise over the coming 12 to 24 months as economic conditions improve.

NAB’s quarterly Commercial Property survey shows industrial values fell 1.5% in the December quarter, with office values down 0.5%. Retail values were up 0.1%, after falling 0.8% in September.

However, the outlook over the next two years is improving. Survey respondents tipped capital values to increase 3.2% by December 2012 for office properties, while retail values are expected to rise 2.9% over the same period.

The outlook is more modest for the industrial sector, where growth of 1.5% is expected over the next two years.

Victoria is expected to be the strongest-performing state for commercial property values over the next two years.

Rental returns also fell in the December quarter, but the outlook is better for 2011. Retail rental returns are expected to rise 1.1% over the year, while the industrial sector is expected to rise 0.6%.

Rental returns for offices are tipped to be the strongest over 2011, rising 1.8% over 2011.

While NAB chief economist Alan Oster says the outlook is improving, a mild over-supply in most commercial property sectors indicates conditions are likely to remain flat – and even slightly soft – for some time to come.

“It depends on what particular sector you are in, but when you look at the retail and industrial sectors, they’re not going into positive territory in a hurry.”

Oster says while predictions about a recovery in rents and capital values need to be taken with some caution, conditions should improve towards the end of 2011 as the economy regains speed.

However, the ability of commercial property developers to get finance could be a stumbling block, at least while the banks remain worried about commercial property exposures.

“Access to credit has been an issue for awhile. There it’s more about the banks being worried about having too much commercial property in their portfolios, rather than being worried about individual properties,” Oster says.