Property Market Update – August 2015
Our Chairman Warwick Hemsley recently presented at an investment seminar hosted by The West Australian where he outlined some sobering statistics impacting on the property market in WA.
While the picture he painted of the current economic climate is pretty grim, he did offer some light at the end of the tunnel, with the bottom of the market cycle potentially in sight. There are also still opportunities out there for those with the capital and the willingness to do some research.
Today’s blog gives you an overview of the information that Warwick provided in his presentation including a snapshot of current economic conditions in WA and the opportunities that still exist in the property market (residential, commercial and industrial).
In terms of the WA economy, a key indicator of how the mining downturn is having an impact is population growth. For many years WA was the fastest growing state in Australia, however WA is now experiencing a dramatic decline in population growth as less people move to WA seeking work in mining or related industries.
In conjunction with declining population growth, unemployment is on the rise as WA’s unemployment rate recently moved above the national average (6.4%). This is a symptom of many companies having to let go of staff along with limited new employment opportunities arising.
The end to the mining boom, rising unemployment and slower population growth have all led to WA’s Gross State Product (GSP) dramatically decreasing, particularly as iron ore prices remain low. Back in 2010/11 WA was growing GSP by over 7% but now it is below the national average down to a forecast 2% in 2014/15.
Due to all of these negative economic statistics, overall business confidence is declining rapidly. According to the ANZ Property Council Property Confidence Index, WA is currently showing the lowest levels of confidence across all property sectors in the country.
So what does all this mean for the property market in WA? Let’s take a look in more detail:
RESIDENTIAL PROPERTY MARKET
After significant periods of growth in 2005/06 and 2012/13 due to unprecedented demand for residential property, median house prices in Perth reached over $550,000 in 2014. In the last 12 months, prices have experienced a downward correction with the median house price now sitting at $530,000 and the unit price at $420,000. While house prices have only experienced a minor correction, it is the unit market that is bearing the brunt of the downturn with prices down 5.7% over the year.
Given the tremendous growth Perth experienced during the boom, a further decrease in prices is possible and while we may be nearing the bottom, we may not have reached it yet.
The rental market is also suffering from decreased demand with Perth’s vacancy rates the highest since 2009 (close to 5%) with over 8000 homes available for rent in Perth.
The rising vacancy rate has caused a significant decrease in average rents with yields now down to 3.9% for houses and 4.5% for units. Given the work that goes into securing a rental property and potential for outgoings of 40%, this is realistically just 2.5% to 3% yields.
Overall, the lower yields make property purchasing decisions even more critical in order to ensure long term capital growth. Therefore it is important to be aware of demographic and government policy related issues that may influence people’s housing needs into the future.
In terms of demographics, couple households are tipped to become the most common household type by 2023. Due to our ageing population, we have more empty nesters and WA is likely to be home to at least 1 million people aged over 65 by 2050.
This means that demand for smaller homes will continue to rise as households get smaller and people’s lifestyles change. Low maintenance, lock and leave properties will be more and more in demand as people look to downsize.
Along with smaller properties comes the rising importance of locations near public transport and other services, particularly for older people who are becoming less reliant on cars to get around.
In response to these changing demographics and the need to plan effectively for Perth’s future growth, the state government has released plans to increase urban consolidation and minimise Perth’s expanding urban footprint. This will mean increasing density around activity centres and transport hubs will become even more common and provide opportunity for further investment in these types of areas.
It would certainly be worth investigating where the new activity centres are planned and the types of urban infill that is likely to progress in order to get an insight into future growth hotspots.
COMMERCIAL PROPERTY MARKET
While the potential net yield in commercial property is higher than residential (6% for prime commercial property and possibly up to 8.5% for secondary properties) it doesn’t come without risk. The commercial property market is experiencing a rapid correction due to economic conditions and statistics in the office and retail sectors clearly reflect this.
Office vacancy rates have been escalating since 2013 due to the mining construction boom downturn and there is likely to be worse to come as the boom continues to unwind. Several large new city office building projects are currently under construction or near completion that will add to supply and push vacancy rates even higher.
In the Perth CBD vacancy rates are closing in on 20% with the July 2015 figures from the Property Council representing a rate of 16.6%. These rates are expected to increase further in the next year which will mean the highest levels of vacancy in Perth for decades.
Rising vacancy rates have inevitably led to average rents decreasing and incentives are also on the rise making this a tenants market. As leases expire, tenants are taking the opportunity to look elsewhere for better deals or negotiating for significant rent reductions in order to agree to stay put.
It is certainly important to consider the difficulty you may encounter in securing or retaining tenants in the current market if you are considering investing in the office market. You may also be hit with having to pay outgoings yourself if there is no tenant to cover these costs in the short to medium term.
When you look at the national picture, confidence in the retail market has been positively influenced by growth in the residential market, low interest rates, a lower Australian dollar and decreasing fuel prices. Unfortunately Perth and WA are going against this trend with the lowest levels of retail spending in the country.
Overall, the value of retail property transactions has fallen sharply in WA (1.3billion in 2012 compared with 20.5million in 2014) however it is important to note that rents and values are currently holding up better than in the office market.
While the market is slow at the moment, as always there are opportunities and some areas that are performing better than others. According to Jones Lang LaSalle research, sub regional and neighbourhood centres are showing the strongest level of activity in WA at the moment.
In terms of future outlook, the emergence of a number of international brands in Perth reflects the long term confidence in our retail market with the likes of H&M, Top Shop, Zara and ALDI all making significant entries into the WA market.
In an era when internet sales are impacting on retail sales, it would be smart to look at sectors that can’t be readily replaced by online stores such as service industries like beauty salons, spas and hairdressers as well as the food and beverage industry.
WA is also working towards further deregulation of trading hours which may benefit larger centres while challenging some smaller retailers and adversely affecting some types of retail property.
While the biggest driver of demand, the mining industry, is declining there are still sectors including infrastructure, construction, transport and logistics that are providing a continued level of demand for industrial land albeit at a reduced rate.
Most of the activity in sales and leasing is occurring in core areas close to the city such as Belmont, Canning Vale, Kewdale, Osborne Park, Welshpool, Jandakot Airport and Perth Airport which have all experienced levels of new development in recent years.
As with the other market sectors that I have previously outlined, caution needs to be exercised if considering purchasing industrial property in the current market be it a factory unit or a large complex. Make sure you do your homework and check the strength of the current tenants including their rent payment history and the length of their lease excluding options.
Also check if the current rent is over the odds as the true market rent could be substantially lower and come rent review time this may be an issue. CPI or fixed percentage increases are more favourable in today’s market.
Be it any type of commercial property, a mix of tenants such as strip shops, local shopping centres or a group of factory units provides some insulation from the risk of a single tenant loss. Also considering the type of industry that your tenant/s are involved in and choosing tenants that are not immediately affected by emerging technology can be a useful risk mitigation strategy. For example video stores and travel agents have recently been hit by new, online technology that is superseding the need for their products and services.
In terms of the location of your potential commercial property investment, busy road exposure and/or strong foot traffic as well as good parking ratios all provide exposure and ease of access for tenants and customers.
It also may be best to avoid locations where major new development may flood the market such as Perth CBD, Malaga factory units and the Bibra Lake industrial area.
In conclusion, while the property market in Perth is in a downward cycle, with all sectors of the market feeling the effects, there remains opportunities for those with the capital who are willing to do the required research.
You can download the presentation slides including graphs and more detailed statistics on this topic from the media section of our website: http://www.qwestpaterson.com.au/qwestmedia.php