A slowing economy presents threats and opportunities for the Australian property sector

Falling residential land prices could be a boon for Australia’s nascent build-to-rent sector, improving the economics of prospective projects by lowering a significant hurdle to new developments.

This is one of the opportunities presented by a slowing economy according to CBRE’s Australia Real Estate Market Outlook 2019 report, as overseas and domestic headwinds impact economic growth this year.

CBRE’s Head of Research, Australia, Bradley Speers said the outlook for the residential sector was a prime example of how the slowing economy presented both threats and opportunities.

“A slowdown in residential construction will have a flown-on impact on the office, industrial and retail sectors, while falling dwelling prices will also weigh on consumer confidence, further impacting retailers and retail landlords,” Mr Speers said.

“Conversely, lower residential land prices will improve returns on prospective build-to-rent developments, with the pace of progression in this emerging sector expected to pick up in 2019. A potential change in federal government in the first half of the year could also open up new dialogue regarding the sector and ultimately result in policies more favourable to build-to-rent.”

On the office front, CBRE’s report highlights that the construction pipeline is being turned back on after being relatively dormant over the past couple of years.

The Melbourne and non-CBD Sydney markets are expected to be the dominant sources of new supply in the short term – partly alleviating the status quo of low vacancy rates and strong rental growth.

“In this environment, the flexible office market, including co-working, serviced offices, meeting/event space and incubators will also continue its strong growth trajectory, in line with the findings from our recent Pacific occupier survey, which showed that some 55% of corporates expect to decrease their traditional leased office footprint over the next two years,” Mr Speers said.

On the retail front, CBRE’s Outlook report highlights that structural and cyclical changes in the retail sector have resulted in a growing number of large retailers exiting the market, with this trend expected to continue in 2019.

“To combat these changes, retailers will increasingly employ omnichannel strategies to capture a slice of the growth in online retail,” Mr Speers said, adding that landlords faced with tenants vacating could also look to repurpose some retail space into serviced-based offerings such as gyms, child care and entertainment.  

The report also highlights a range of other threats, opportunities and forecasts, including; 

• While manufacturing and construction will be weaker this year, impacting the industrial sector, the first proposals for multi-storey warehouses in Sydney and Melbourne are expected to emerge this year. Mr Speers said industrial land prices in inner-city locations had grown strongly over recent years and this, combined with growing demand for last-mile logistics solutions, meant the economics for multi-storey warehousing stacked up.

• Australian banks will continue to be more stringent in lending on residential developments and commercial property that is deemed higher risk. This will present opportunities for alternative lending sources, with the Australian banks’ share of lending within commercial property expected to decline this year.

• While the weaker economy will lead to a decline in corporate travel this year, the corresponding weaker Australian dollar will boost tourism and the hotel sector by attracting international travellers and dissuading Aussies from travelling abroad. Mr Speers said the lower AUD could also attract more overseas investors to the Australian commercial sector this year. “This is particularly the case for those investors who don’t hedge against currency and stand to receive the full benefit of currency appreciation in future years,” Mr Speers said.