Interest rates staying low for longer

The RBA believes rates are about right although does reserve the right to ease if required. In light of this, the economy look set to be in a period of low for longer interest rate settings, in an attempt to stimulate the economy from a GDP and employment and inflation leading to wages increase perspective.

The property market in 2019 has fundamentally stood tall and demonstrated its resilience. This low for longer interest rate environment means real assets and in particular Real Estate, will continue to be well sought after as investors chase yield.

In particular, Australia will continue to attract foreign capital supported by a cheap AUD, positive yield spreads to debt enabling positive funding from leverage and the lag effect of cap rate compression due to some skepticism of further runs in yield as we hit all-time yield lows/highs in valuation.

Property outlook into the commercial sectors

2020 will see the commercial office sector continue to compress, supported by limited supply and developer discipline as CBD tenants begin to push their boundaries of space capacity. A lot of our clients will continue to favour the Sydney and Melbourne CBD, North Sydney, Parramatta and interestingly are beginning to think Perth has reverted too far and may provide risk opportunities. As with Perth, Brisbane could also provide risk opportunities as vacancies contract and new development remains scarce.

Industrial, but more so Logistics, will continue to attract capital as it continues to support the e-commerce thematic. We are concerned about the low growth in rents, however the inbuilt rent bumps of 2-3% will support overall.

Retail is the interesting asset class and perhaps with tough retail sales turnover, a forgotten asset class with opportunities. With centres such as Marion in SA and Booragoon WA recently trading relatively easily for their financial size and demand for non-discretionary retail still sought after (especially by private investors and syndicates), there remains no forced sellers in response to financiers requirements, although there have been fund withdrawal demands that may have prompted transactions. 

Retail is worth looking at, especially supported by population densification and rising or changing socio-economic conditions of the surrounding demographic.

The Hotel and Pub sector will remain strong in 2020. The Savills Hotels Australian team has transacted over AU$1.7 billion worth of hotels, pubs and leisure real estate and valued over AU$4 billion of hospitality assets in just the past 12 months, highlighting the global and local appetite for this asset class.

A look back over 2019

Looking back at our transactions and completions this year, we have certainly had some significant highlights. Our Capital Transactions team successfully completed the sale of 80 Collins Street in Melbourne for $1.476 billion on behalf of QIC, were responsible for the sale of 133-145 Castlereagh Street, Sydney to Stockland for AU$347 million and in Perth, assisted GDI Property Group in the purchase of 19 DVG Automotive Group dealerships across 5 metropolitan suburbs within Perth for AU$98 million. Our Project Management team also achieved practical completion of 60 Martin Place, involving the construction of over 40,000sq m of premium quality office and retail space Sydney.

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For more articles exploring the trends, highlights and outlook of the 2019/2020 property markets, click here.