Recent Study: Australia Real Estate Report Q1 2014

Australia's real estate sector has emerged as an attractive destination for capital investment in light of the increased risks in the mining sector. That said, China's slowdown and its effect on the Australian economy in 2013 and the coming years is subduing growth in yields. Consumer confidence is low in light of the potential for job losses which is particularly affecting the retail sector. However, off the back of this we have noted increasing activity surrounding the sale of shopping centres as buyers make plays whilst prices are cheaper, banking on the recovery of consumer confidence we are forecasting for 2014. The office and industrial sectors have suffered as business confidence is low. Office vacancies have reached 10%. A lack of high-grade industrial real estate has seen demand for low quality assets grow as buyers look to acquire plots for residential development.

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Australian commercial real estate continues to be fairly balanced because, structurally, the industry functions in a way that restricts overdevelopment. It operates in an economy that, despite weak consumer sentiment and structural changes, is performing reasonably well. The economy and sector are underpinned by resources and demand from China, a present but declining threat of interest rate rises, low unemployment and a strong infrastructure sector. We caution, however, that our short-term outlook for the economy is bearish, and the country will be negatively affected by the slowdown in Chinese economic growth.

Although rents in some regions experienced strong growth, it seems our view for a slowdown in Australia's economic growth has already started to play out and affect the sector, although the office market seems to be resisting this trend for the time being.

Key Points

* Despite a pick-up in metal prices and improving global economy, we maintain our view the improvements in the mining sector will be insufficient fuel for economic growth in 2014. Related investment in this industry continues to be weighed down by high costs. Moreover, we believe that the recovery in the Chinese economy is not permanent, given that much of the structural imbalances remain at hand.
* Given our outlook for the Australian job market to deteriorate in 2014 and 2015, forecasting unemployment to rise to 6.3% and 6.4% respectively, from an estimated 5.7% in 2013 , we believe that demand for space will continue to decline over the medium term.
* The overextended household balance sheets further augur the growth in housing-related credit growth. In our opinion, the Australian banking sector is the sector most leveraged on the real estate market and we expect that declines in house prices will adversely impact the industry.

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