A sharply weaker retail scene and deteriorating hotels sector pulled a key barometer of commercial property sentiment into negative territory for the first time in four years.
NAB’s Commercial Property Index fell 11 points to -2 in the March quarter, dragged down by a slump in the measure for retail property – which fell 26 points to -44 – and a steep decline in the separate sub-index for hotels, which shed 13 points to -13.
Sentiment weakened in the office and industrial sectors, even as those separate sub-indexes remained positive.
“Sentiment was led down by a very weak retail sector, with CBD Hotels also posting its first negative read since mid-2016,” NAB chief economist Alan Oster said.
“This will have been influenced by the slowing economic growth momentum into the March quarter, with the situation in discretionary retail and consumption more generally deteriorating even further.”
Expectations of falling capital values and rising vacancies in all states except Queensland and WA – which was unchanged from the previous quarter – along with deteriorating rental rate expectations, drove the worsening of sentiment in the retail sector.
In hotels – which marked their first negative reading since mid-2016 – deteriorated on the back of negative expectations for both capital growth and room rates in the next 1 to 2 years.
Falling room rates are a big issue at the AHICE hotels conference taking place in Melbourne this week.
“My Sydney hotels are at 90 per cent occupancy rates and yet my revenue has dropped 10 per cent,” Hotel tycoon Jerry Schwartz said on Wednesday.
“We’re pretty much at the top of circle [in terms of occupancy rates] and that’s when you keep rates up. But look what is happening with rates.”
The NAB index, based on survey responses of 300 industry professionals, said sentiment over credit had worsened, with funding conditions expected to deteriorate over the next 3 to 6 months.
Capital growth expectations for the next year were strongest for office property, with QLD and WA expected to lead the way after a long period of under-performance.
Income returns were also expected to be highest for office property in the next 1 to 2 years, with rents to grow fastest in Victoria next year and Queensland in two years’ time.
Optimism for the Victorian CBD market underpinned Dexus’ announcement on Thursday that it would pay $1.476 billion to purchase the QIC-developed 80 Collins Street tower.
The number of developers expecting to start new works over next 6 months fell to 41 per cent in the March quarter, the NAB survey showed. The number of developers targeting residential projects also remains below average.
A separate report from JLL shows the number of apartments being marketed has nearly halved over the past 12 months as developers have retreated, paving the way for a rental affordability crisis as new supply fails to keep up with growing demand.
Keep up with Commercial Real Estate news.