2017: Upside and downside risks finely balanced
The Australian Real Estate Quarterly Review Q1 2017 reports on the outlook for Australian office, industrial and retail sectors.
The focus this quarter is on how the upside and downside risks appear finely balanced in the year ahead.
The investment climate is characterised by a wider range of possible outcomes than usual. The potential upside could come from a stronger US economy, while the downside risk could come from declining growth for China or an easing of housing construction locally.
The most likely outcome is continued positive leasing demand for office, industrial and retail buildings based on resilient economic growth in Australia.
The prospect of rising US interest rates has implications for pricing of real estate globally, however the relative stability of Australian rates is expected to help smooth the local pricing cycle. While property values have been rising in recent times, the rate of gain is expected to slow in the year ahead.
The Sydney and Melbourne office markets are now in a strong growth phase, with a 22.5% lift in net effective rents in the Sydney CBD, the strongest rise since 2008. While the prospect of new supply may become an issue for the Sydney market in time, the short-to-medium term outlook is buoyant, given that most planned new supply is scheduled to complete in FY20 or beyond. The cyclical nature of the office market warrants the use of conservative growth assumptions over the longer term.