So far, commercial property looks sound enough in most parts of Australia. Chan & Naylor talks about it in detail.
People are concerned about a possible real estate bubble in Australia that could wreak havoc on the country's economy. What everyone does not know is commercial property could even be a bigger risk than the huge debt taken on for residential property.
Experts and economists are worried about the recent increase in prices of offices, warehouses, shopping centres and new developments. Notably, commercial real estate is more prone to booms and busts than residential real estate. The prices of offices and industrial property almost went vertical in the last few years but rents are not keeping up.
The Reserve Bank of Australia has already warned on commercial property and reminded us of history when Australia went through a commercial real estate bust in the 1990s and nearly sent the banks broke. The economy was buoyant and the commercial property price growth was strong in the late 1980s. Because of a ready supply of credit and lowered lending standards, there was a boom, but it almost ended in disaster with office prices dropping by half and banks needing to be rescued and raise capital.
Commercial real estate does not have a similar structure as mortgages because the lenders have much less incentive to pay back the loan. The good news is that Australia's big banks are almost certainly safe enough to survive a commercial property crisis and Asian banks have stepped up to the plate, increasing the amount they are lending to commercial property projects. The financial risk is offshore and any property could be purchased at a low price by an Australian business should there be a distressed sale.
So far, commercial property looks sound enough in most parts of Australia. Only Perth is experiencing a spike in office real estate vacancies. For now, low vacancy rates in Sydney and Melbourne are a good sign. As long as office towers are filled with thriving businesses which can pay rent, commercial property developers may not go broke.
What can you do? If you would like to know more about property investment, contact Chan & Naylor Group.