Weak rents strong pricing delivers modest growth

Weak rents, strong pricing delivers modest growthTenant demand is firming, and Australia’s property pricing cycle is running “well ahead” of the rental cycle, according to DEXUS’s Australian Real Estate Quarterly Review.The report for the third quarter of 2015 assesses the current state and outlook for the Australian office, industrial and retail markets.According to Peter Studley, DEXUS’s general manager of research, “the property pricing cycle in Australia is running well ahead of the market rent cycle, as investors search for secure income yields provided by well-leased properties. Values are expected to firm further in the year ahead.”The position of property markets in their cycle is a key area of consideration for investors seeking good investment returns. DEXUS argues that the rental cycle – defined by movement in effective rent – is weak, with most markets remaining in or slowly recovering from a trough.Tenant demand, however, is “turning positive”, although DEXUS says the ready availability of new supply will subdue growth in the FY2016.However, the leading indicators for office demand are positive, with improving business confidence and growth in the IT, finance and professional service sectors driving leasing activity, particularly among small firms.”Positive net absorption of office space in the east coast markets will provide a welcome offset to new supply scheduled to complete in FY2016,” Studley says.The pricing cycle – representing the movement in average prime yields – is strong. Property yields continue to compress as investors compete for prime assets. DEXUS finds that yields have moved well below average and are approaching peak 2007 levels in east coast markets.The value cycle, resulting from the combined movement of rental and pricing cycles, is moderate, with the weak rent and strong pricing cycles keeping value growth to modest levels.”There is a wide divergence between states and cities, with the Sydney and Melbourne property markets leading Brisbane and Perth through the cycle,” Studley cautions.Read DEXUS’s Australian Real Estate Quarterly Review.