Westpac looks at dozens of data sources to understand how the commercial property sector is faring and what’s ahead on the horizon. But Westpac’s National General Manager for Property Finance, Marty Green, has a watchful eye on three.
When financial markets are changing from minute to minute, and every sector of the economy is facing tumultuous times, how do we make sense of it all?
With four brands – Westpac, Bank SA, Bank of Melbourne and St.George – all actively supporting Australia’s commercial property sector – Green and his team have access to deep lakes of data that offer unique insights into how Australia’s commercial property markets are functioning. Green points to three indicators as the ones to watch…
Interest rates
Every piece of data – from payroll costs to inflation adjustments – tells a story. But interest rates are the headline grabber for good reason. The Reserve Bank raised the cash rate target by 25 basis points in early May – and Green expects the further rate rises ahead will have an impact on investor demand at current record low yields in most asset classes.
This will influence consumer and business confidence – and may take the heat out of commercial property, notably the industrial sector. Industrial land costs and values have grown by 80 per cent over the last two years, Green notes. “In some markets industrial land is now of a similar value to residential land – and that’s something we’ve never seen before in Australia.”
House prices
The Bank has seen significant business activity and house price escalation in some residential markets. In Geelong, for example, business lending activity has trebled since Covid. Similar business lending activity and house price growth has been seen on the Gold Coast. Green says these two markets are examples of two fast-growing major city-linked urban growth areas that “are commutable and lifestyle driven”.
But Australia’s two biggest cities are very price sensitive to interest rates, Green observes. “People are highly leveraged in Sydney and Melbourne, although they are less so other cities.” Analysts expect a “very significant correction in house prices”.
Green says Westpac is conscious of the double impact on borrowers with both yields compressing and interest rates lifting.
“The way the Bank looks at commercial markets is to adjust to where we expect interest rates to move. Then we assess whether the client can afford to service and amortise if rents and incentives adjust and values shift.”
Office occupancy rates
The Property Council’s most recent office occupancy figures, released in April, showed that CBD workers continue to return to their CBD workplaces. However, office occupancy remains less than half of pre-pandemic levels in most cities.
Green expects to see a “significant recalibration” over the next 24 months as “corporate Australia rethinks how it uses space in our major cities”. He predicts vacancies could rise substantially. “The jury is still out on this but it’s something we keep a very close eye on in the bank.”
When will rentals rise and how will this impact property yields and values?
Green says growth in office rents will need to offset possible softening property yields before values rise. Secondary, regional and short weighted average lease expiry markets are likely to be the most challenging.
“We expect there will be opportunities to upgrade older prime or some secondary offices to meet new needs, coupled with emerging ESG requirements.”
Westpac is the principal partner of the Property Council’s National Mentoring Program.