Broad-based economic growth is supporting positive occupier demand for space across the office and industrial sectors in Australia.
Economic growth experienced across Australian states over the past few years is rebalancing, with Queensland and Western Australia forecast to catch up to Victoria and New South Wales over the next couple of years. While buoyed by infrastructure investment, Victoria and New South Wales may face some headwinds in FY19 and FY20 as weakening housing construction drags on employment growth.
The cost of capital remains low, continuing to support investment demand for real estate. The maintenance of reasonably wide spreads between real estate yields and government bond yields has supported investment activity to date in a maturing pricing cycle. Over time, pricing will be sensitive to a normalisation of interest rate yields, however such rises appear to be some way off.
The performance of office markets is influenced by the strength of the broader economy and business confidence, the supply and demand characteristics of particular CBD markets and the leasing characteristics of individual properties.
Office markets continue to perform well. Modest levels of supply in Sydney and Melbourne helped push vacancy rates lower to circa 4.5% and we expect further falls with vacancy expected to fall below 3.5% in Sydney in FY19. Perth continued its recovery while the overall Brisbane market showed mild improvement.
The outlook for office demand is positive in the short-term due to solid employment growth and positive business confidence. The outlook is for mild upward pressure on rents in the short term in Sydney and Melbourne, with growth declining on a two to three-year timeframe as new supply materialises.
A key theme for office markets is growth in small office users as service firms shift to more collaborative, outsourced modes of working and the IT sector continues its mini-boom built on mobile applications, big data, fintech and social media.
Sydney continues to perform strongly with prime gross effective rents increasing by more than 12% over the past year. The outlook appears favourable in the short term given solid demand and a constrained supply pipeline which will push the vacancy rate lower in the year ahead. Solid demand and low vacancy will support rents over the next 1-2 years with the majority of new supply not expected until FY22-24.
of Dexus office portfolio
The industrial sector is in a growth phase with demand running ahead of supply. Demand is expected to remain solid in the year ahead given population growth and infrastructure investment are supporting economic activity. Sydney, Melbourne, and to a lesser extent Brisbane, are well placed to benefit.
E-commerce is emerging as a significant driver of demand as online sales expand at double digit growth rates, and online retailers and fulfilment providers seek to increase scale.
The outlook for rents is likely to remain positive, particularly in land constrained areas in Sydney and Melbourne. Conditions in Brisbane are expected to continue to improve in the short term as the economy rebounds, while Perth appears to have bottomed.