Employment, dwelling approvals and new wave of office tenants are shaping property market.
The audience at a Colliers International presentation was told the rhythms of a normal property market were returning to Perth and the city’s property market was travelling well through a normal correction.
Colliers International Director Valuation and Advisory Services John Del Dosso told the industry gathering that expectations about the WA property market had been skewed by a long period of growth and now needed to be adjusted to reflect more normal market conditions.
“If you look back 15 years ago a lot of people who entered the property market were then in their 20s now they are in their mid- to late 30s and have only seen WA’s property market go in one direction. That’s not WA and that’s not normal,” Mr Del Dosso said.
“What we have experienced in the last 15 years is not normal so we do have to change our expectations.”
Speaking at the Colliers International event ‘A Spotlight on Property’ at the WA Club, Mr Del Dosso said WA was adjusting from the longest growth period in 40 years.
“There’s a good chance we will now have the longest drag on the bottom of the market in 40 years as well.”
Mr Del Dosso said wage growth had stalled and there had been a shift from full-time work to part-time and casual work and this was flowing through to lower household income and retail spending.
“We spend less, we can afford to pay less for property and we go out less.
“Interest rates have done us an amazing favour for the past three years and have stabilised household expenditure and income change and kept things affordable and manageable.
“But the real risk now is the impact of short-term employment on household incomes and for how long low interest rates will remain a stabilising factor.
“The reality is that much of Australia, like the rest of the world, is hocked-up to their eye brows, and if interest rates go up materially there could be a calamity in WA.”
Mr Del Dosso said the residential market had held up well and there was not a material decline in any sub-market. He said although there had been some adjustment in prices, most of the negativity was based on transaction volumes.
“This looks and feels like a normal correction and right now, there’s no reason to panic,” he said.
“The market is doing okay. The reality is we are selling and leasing at the same sort of rates that we were in the 1990s, but our expectations are based on five years ago. We have not yet seen a massive correction on price.”
In many of Perth’s older suburbs, Mr Del Dosso said there was pent up demand for alternative dwelling choices that would increase housing options for young adults and downsizers.
He said these sites were usually within aging communities that had moved through full family life cycles and were now ripe for gentrification.
“Many infill opportunities remain in former commercial and industrial precincts that have been encircled by residential development.”
According to Mr Del Dosso, residential vacancies may rise further in the short-term and rents may see further declines, but these factors would also sow the seeds of a recovery.
“Dwelling approvals and construction starts have been in decline for three years and as a result, in time, the existing stock availability and pending supply will be absorbed.”
He said properties within a 5km to 20km radius of the CBD would weather the downturn best as renters weigh-up the cost of long commutes against the many rental choices closer to the CBD.
“You could pay $300 a week to live in Mandurah but it’s costing you $100 each week for transport and two hours a day in lost time when you could live within five kilometres of the city and rent something for between $450 and $500.
“Choice and affordability is staring to pull people back into the city core.”
Vacancy rates have always been a leading indicator in WA’s property market and Mr Del Dosso said that in the past, a residential vacancy rate trending below four per cent was generally accompanied by improved sales activity.
According to REIWA figures, Perth has a 6.0 per cent residential vacancy.
Mr Del Dosso said small businesses were returning to the city office market after being forced out by mining companies and engineering firms that could afford the high rents.
“The reality of the transition in the CBD is that high vacancy rates and a reduction in rents are factors that are making it attractive for small business and that’s what we are seeing on the ground.
“We are now seeing lots of small business deals. Big leases are few and far between, there’s some packages out there but not in material numbers to underpin the market.
“Activity in the market is small business coming back into the city and the activity suggests rents are stabilising, incentives seem to have stabilized and the market is normalising.
“This is probably as good as we are going to see it. We are probably at the bottom of the market.
“On the ground, the CBD market is stabilising, there’s a lot of capital looking for strong, secure investments, if you have a leased building in the CBD, capitalisation rates are as tight as they have ever been, and there will be lots of demand for that property but the unfortunate side of that same equation is if you don’t have a tenant you’re going to get a kick in the butt because it’s all about cash flow and tenants.
“The formation of new initiatives and opportunities in WA will be supported by affordable office occupancy costs and supported by good access to quality labour, good skills and cheaper labour rates.”
After outperforming the rest of Australia for 15 years, Mr Del Dosso said WA’s retail spending had been in decline since 2012 and even strong spending on hospitality and food was now falling.
He said vacancy rates at shopping centres and the CBD had been hit hard in 2014 and 2015 by the downturn in retail spending.
“New life is coming back into the CBD’s retail and rental activity has improved and so far in 2016 we have seen the vacancy rate tighten,” he said.
“Rents at major regional shopping centres have held their own but sub-regional and neighbourhood centres have been weaker.
“The issue for shopping centres and the CBD market is the new supply prospect of some 400,000sqm of planned retail space. It’s questionable whether it happens or not, because the feasibility may not be supported in an environment of weaker retail turnover.
“One of the potential strategies to offset weaker turnover growth is to increase market share by increasing the size of shopping centres and but this could then pose a risk to inner sub-regional and neighbourhood centres.
“Regional centres such as Booragoon, Cannington, Whitfords, Innaloo and Morley are all planning significant retail space additions and it will be sub-regional and neighbourhood centres that sit in the shadows of these centres that will suffer because specialty tenants will follow regional centres where they are guaranteed more pedestrian activity and the benefit of destination shopping.
“Do we actually need any more retail for WA? We are right up there in terms of retail square metres per person. I suspect if that supply comes in the short-term, it may not be a pretty picture.
“Shopping centres are expensive to build and at the moment, many specialty tenants are struggling because turnover is down. You also need big rents to support the feasibility on a shopping centre and I think there are a lot of small businesses out there who will say for now at least that they can’t afford those rents.”