The future looks bright for commercial real estate markets thanks to the supportive backdrop of Australia’s strong and sustained growth, according to the world’s largest independent property consultancy Knight Frank.
Several major markets around the country experienced one of their biggest selling years in the previous 12 months, and the strong appetites of offshore capital groups especially from Hong Kong, Singapore and Europe for Australian real estate show no sign of abating say the firm’s Joint Heads of Institutional Sales, Paul Roberts and Ben Schubert.
“These groups are seeking core assets with fundamental stability. Local wholesale funds and superannuation groups also remain just as competitive.
“However the gradual tightening of global credit conditions could result in higher borrowing costs in Australia and weigh on the market, ending the recent pattern of broad-based yield compression.”
With this in mind, Knight Frank head of research and consulting Ben Burston identifies the following five trends as those which will define 2019:
1. Rental growth as yield compression wanes
Mr Burston notes that nine years have passed since the last broad-based downturn leading to a perception of the market as distinctly ‘late-cycle’.
“In our view, the pace of yield compression and consequently capital value growth are likely to slow in 2019,” Mr Burston says. “As a result, performance will become more varied and depend to a greater extent on rental growth and asset specifics.
“Skilled operators, focussed on assets with rental growth potential will out-perform in this environment as the market transitions to a new phase.”
2. Focus on emerging fringes
When it comes to rental growth, ‘substantial opportunity’ is to be found in Sydney and Melbourne’s emerging urban fringes as tenants look to escape escalating rents in tighter markets.
In Sydney, Mr Burston pinpoints Pyrmont, Surry Hills, and Alexandria, and in Melbourne, Richmond, Cremorne and Collingwood. “Many of these markets offer cutting-edge amenity and in time will benefit from public infrastructure improvements,” he says.
3. The growth of urban logistics
Office tenants are not the only ones gravitating to these up and coming areas on city fringes. . “Competition to speed up delivery times is a key driver of this, to counter the well-documented ‘last mile problem’,” Mr. Burston says. (last mile referring to being farther than an easy walking distance away from a transit station)
“This will pull some of the demand inward, closer to the end user rather than on outer rims of cities.
With the food delivery market growing by almost 18% annually the use of ‘dark kitchens’ – restaurants investing in shared spaces in industrial facilities to enable a more efficient preparation and delivery process – will also boost demand for space in urban areas.
Deliveroo Editions in Melbourne is a prime example of a delivery-only kitchen, giving customers access to food from restaurants that haven’t opened in proximity to where they live, allowing these restaurant brands to grow in new areas without needing to open new premises.
4. Space-as-a-service to become more entrenched
The space-as-a-service model is rapidly becoming the new reality, Mr. Burston says.
Latest estimates show almost 18,000 co-working spaces around the world, accommodating almost 1.7 million workers – representing growth of 3,500% and 8,000%, respectively, since the start of this decade.
“Now they are rapidly scaling up in Australia as well, having become a growing feature of all major office markets, with substantial scope for further growth, since they still only represent around 1.5% of the stock in Sydney and Melbourne.”
This has already seen pressure placed on landlords particularly at the smaller end of the market to compete more directly with co-working operators, with many owners now offering speculative suites and ‘plug and play’ office space alongside their traditional office space.
5. The upturn in commodity industries to boost leasing demand
Knight Frank sees positive flow-on from the partial rebound in commodity prices which has followed a protracted downturn in mining investment. This downturn hit the Perth and Brisbane markets hard, but there is now the prospect of a return to exploration and investment activity.
Also, while vacancies, in general, have been high in Perth in particular, the prime market has been rapidly tightening and large tenants are now being forced to pre-commit to new buildings due to a shortage of available prime stock. Investor interest is increasing, and demand from both domestic and offshore groups will rise in the coming 12 months.
Knight Frank LLP is the leading independent global property consultancy. Headquartered in London, Knight Frank has more than 18,000 people operating from 523 offices across 60 markets. The Group advises clients ranging from individual owners and buyers to major developers, investors, and corporate tenants. For further information about the Company, please visit knightfrank.com.