by Mish Daniel | Free Information
Australia is still in the midst of a property boom predicted to last beyond 2022. As we continue to navigate the post-pandemic world, many interesting phenomena are changing the way and rate that commercial property is being purchased.
According to CoreLogic, the leading property analysts for Australia and New Zealand, this year has seen the highest upswing in the housing market in 30 years – something that is “absolutely rare”.
So how does this relate to commercial property?
Factors Affecting Commercial Property Value
Whether you’re looking to invest in commercial office space, warehouse space or retail space, understanding the elements that determine property value is critical for a positive cash flow investment.
Australia’s commercial real estate market research study focuses on market activities in important sub sectors such as offices, retail, industrial, and multifamily.
The study looks at the population, city-level GDP, business and commercial construction activity, demography, and other aspects in Australia’s major cities.
The factors affecting value in commercial real estate can be broadly divided into three categories:
- Economic
- Location
- Property
Economic Factors
Economic factors that affect property valuation include both supply and demand operators, such as:
- interest rates (obviously!)
- real GDP growth
- wage growth
- the unemployment rate
- the household savings rate
- migration rates and changes in the overall population
Location Factors
Population Growth
For example, all property values in Australia’s two largest cities have increased dramatically compared to the rest of the country. Sydney has seen a population increase of over 2% in the past 5 years, while Melbourne’s population has increased by over 3.7% taking its population to 5 million people.
As a result of this population boom, the demand for commercial property has risen to support growing communities with essential infrastructures like hospitals, shopping centres, restaurants and offices.
Transport
After the inauguration of several government initiatives throughout Sydney, we have already seen the impact of enhanced transportation quality. Property prices in Liverpool, for example, have risen as the area has grown as a transportation hub for Sydney’s southwest. Since 2009, house prices in Liverpool have increased by 134 percent, roughly double the national average.
Higher activity in a location like Liverpool directly influences commercial property in increased demand for traditional retail property and strata, as small businesses try to capitalise on increased foot traffic. And, when a region grows, services such as legal companies and accounting firms become more prevalent.
Property Factors
Functionality & Appearance
The building’s age and its services (such as lifts and lobby) and how it appears are important.
Location
Zoning and nearby structures (which tend to overlap with location) are also crucial considerations. For example, suppose a traditional retail property is located in an area dominated by flats, and there is a scarcity of restaurants to serve the residents. In that case, the retail property’s value may rise as eateries battle for space.
Development potential
Another factor is the growth potential. FSR (floor space ratio) boosts development potential, and valuation frequently follows suit.
Are property values going up?
Most analysts predict that house prices will continue to rise next year as the Australian economy’s stronger-than-expected rebound gets traction and bank financing remains affordable.
Market experts predict that prices will continue to rise after then, even if some places’ prices may begin to decline and revert to their long-term percentage annual growth rates in the low single digits.
There’s no denying that the long-term outlooks for Australia’s capital city markets have improved.
Economists and banks, some of whom expected a 30% drop in Australian home prices at the start of 2020, have virtually all significantly revised their forecasts.
They are considerably more cheery these days. According to research released recently by ANZ Bank, national house prices would climb by a healthy 17% through 2021 before dropping to 6% in 2022.
Australian Property Market Outlook
If these predictions come true, buyers and sellers might expect Federal Government involvement in the market to slow price growth. If property prices continue to rise, ANZ senior economist Felicity Emmett anticipates the Australian Prudential Regulation Authority (APRA) to deploy macroprudential measures to curb growth in 2022.
Other banks expect lending restrictions to be implemented as well. According to National Australia Bank chairman Phil Chronican, mortgage lending restrictions would make sense if regulators wanted to take some of the heat out of the hot housing market, which has been fueled by ultra-low debt.
However, any action to halt property loans would only have a short impact on house prices, which are ultimately inflated by insufficient supply and cheap money, according to the senior banker.
He suggests that policymakers intervene in the market through lending limits, known as macroprudential policy if they wish to keep reaping the economic benefits of very low rates without the asset price boom.
According to CBA Chief Executive Officer Matt Comyn, the Commonwealth Bank has increased its property price growth prediction for 2021 from 8% to 10%.
Property prices are likely to continue to rise this calendar year and next, but not at the same rate as in February and March, which was rather rapid.
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