Rents to Rise in 2011 and Yields Compress
THE improvement in property markets post Global Financial Crisis has been very gradual.
It has and will continue to take time for the cycle to unfold, for debt-ridden properties to be sold at a new pricing level, for business expansion to proceed at a pace sufficient to make a difference to property indicators such as vacancy and rents, and for investors to come back in enough numbers to give pricing a more positive direction.
But 2011 will be a better year than 2010, just as last year was better than 2009. To go back, first, we must move forward, and the cycle is moving slowly; that will be its nature.
Six big trends for 2011:
1. Rents will start to rise
2. Yields will start to compress
3. Mining will start to drive property again
4. Sustainability: it's here for good this time
5. Development comes back to life
6. Niche property sectors are back
It will be held back by fragile confidence, uncertainty and a high cost of debt. Still, we should be thankful we're in the Pacific Region, linked increasingly to Asia, for the recovery is set to move at a slower pace in the USA and Europe.
The other feature of this cycle is it's all mixed up; that's what makes it interesting. It's not easy and sometimes downright misleading to use generalisations to describe the position of different sectors, markets and their forecasts.
Nonetheless, we think stronger trends and issues will emerge in 2011 a some cyclical, some structural. We've pulled out six we think will be the defining issues and trends of the year ahead.
Rents will start to rise:
Tenants may not want to hear it, but owners have been waiting more than two years for it: office rents will start to rise in 2011. We think the process has already begun; in the third quarter of 2010, leasing incentives started to move down in the Melbourne CBD office market. We think this represents the first step in the recovery process which will grow in strength in 2011 and spread to Adelaide and Sydney, before reaching Brisbane and Perth a year or so later.
Rising office rents will be in response to relatively low vacancy in Melbourne, Sydney and Adelaide, which will start to fall in 2011 as business continues to expand. This will lead to improved income returns in the office sector and push it to the top of the total return rankings for the year ahead.
The retail sector may not be so lucky in 2011. The sector remains challenged by low growth in turnover, selective purchasing and a rush to internet shopping from overseas, thanks to the high dollar.
We don't expect to see stronger upward pressure on rents until the second half of the year and, even then, it will be too late to post a strong growth rate for 2011. Yields are also less likely to compress significantly for the larger centres in 2011. All up, though, as a sector overall, you're unlikely to see any significant change in total returns in 2011 from retail.
The industrial sector is recovering quickly, again driven by the bigger markets of Melbourne and Sydney. This should be enough to see rents stabilise in early 2011, before showing a small rise before the end of the year.
Yields will start to compress:
It's hard to imagine now, but sometime in 2011, yields will compress across most sectors and markets, marking the beginning of the new value cycle.
We think the outlook will improve sufficiently during 2011 for this to occur and higher levels of bidding from a larger number of onshore investors will encourage it. …