Even as consumer confidence rises, business confidence and conditions remain weak.
The NAB’s business confidence and conditions survey for July was notable for numerous signs of weakness and question marks over the continuing strength of demand in the domestic economy.
This week’s housing finance data also raised questions about the strength of demand for home building and existing homes.
Now another survey from the NAB has raised questions about the strength of demand in commercial property.
The Bank’s new quarterly commercial property Index (which was started in April) suggests conditions deteriorated in the June quarter.
NAB said the Commercial Property Index fell 20 points in the June quarter, to -10 index points, thereby joining business confidence and conditions on the slide.
The bank said in commentary that while a recovery is still anticipated over the coming year, "sentiment has dampened across all sectors, recovery timeframes have been widened and return expectations lowered."
It said that on the basis of more than 200 respondents to the survey it had found that Office property expectations remain the strongest, followed by Retail and Industrial.
"The Hotels/Entertainment sector is still very weak," it commented, which is supported by numerous hotels in NSW and Sydney being in administration.
"All sectors (excluding Hotels), are tipped to improve within the next 6 months, however the stand out performer remains Office with a significant turnaround in sentiment for the 6 and 12 month periods.
"Retail confidence however is significantly down on March quarter expectations.
"Industrial is still expected to recover solidly over the next 12 months, however 6 month expectations have been significantly revised down.
"Melbourne remains the strongest performer in the current period (particularly Office), with Sydney gaining some ground in Retail and Industrial over the year."
The bank said that as a result of the slide in confidence and conditions, "development commencement plans have been pushed out as market conditions remain uncertain and credit conditions have become more difficult."
On a state by state basis, more than half of the works look to be centred in NSW and Victoria in the next 12 months (45%), with QLD (19%) also showing solid intentions to move into development projects within the next 12 months. All intended WA (14%) development is due to take place within the next 12 months.
The bank said ‘A grade’ and ‘Premium’ office stock are expected to stay in vogue as investors look to “de-risk” income returns.
Capital values are now expected to experience flat or negative growth across all commercial sectors over the next 6 months, before showing signs of improvement over the year. Over 12 months Office (+2.6%) is considered the best investment option, followed by Industrial (+1.2%) and Retail (+0.6%).
Rents are likely to follow, with Office (+2%) Industrial (+0.8%) and Retail ((+0.1%) all expected to improve over the next 12 months after a tough interim.
Vacancy expectations for all commercial markets have stagnated, with no improvement expected until the new year.
Respondent’s recovery expectations have now pushed out into late 2010/early 2011 for Office and Retail, while Industrial respondents are divided between late 2010 and mid 2011. On average, expectations for recovery are now 6 months further out when compared to Q1.
80% of developers surveyed indicated that they will be commencing new works within the next 12 months, up 8% on last quarter. That said, most works look to have been pushed out by around 6 months. 70% of land/stock to be developed is already under existing ownership.
Respondents have indicated they have found both debt and equity sourcing more difficult than expected last quarter, with Q3 2010 not expected to deliver any reprieve.
42% of respondents plan to source more debt within the next 6 months (down from 50% last quarter). In addition, the percentage of respondents ruling out any debt additions is now rising (now 50%, up 4% on last quarter).
Current pre-commitment requirements estimated at 55% with about a third of all respondents feeling confident that lending criteria will improve significantly within 12 months.
Availability of stock is once again the main concern currently facing the commercial property market. However more respondents are now rating interest rates/costs of finance and availability of debt as challenges, compared to our previous survey.
The NAB says there are 248 respondents in the survey, comprising Real Estate Agents/Managers (51%), Property Developers (19%), Asset/Fund Managers (15%) and Owners/Investors (16%).
