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Property Market Has Plenty to Offer

Tony Brasier is the President of the Real Estate Institute of Australia (REIA), the national professional association for the real estate industry in Australia. REIA is a politically non-aligned organization that provides researched and well informed advice to the Federal Government, Opposition, media and the public on a range of issues affecting property market.

As the residential property market has stabilised in the eastern states of Australia over the past 18 months, property investors have begun looking at the commercial property market as an alternative to invest. Small business owners keen to reduce business running costs, secure their business location and invest are also increasingly looking to purchase commercial property. The longer term leases and traditionally higher yields available in the commercial sector are advantages that attract property investors.

As with any form of investment, it's important to know and research the product before investing. A key difference from the residential property market is the presence of large-scale investors. Investors using commercial property data to help make their decision about when and where to buy should be aware that data can be distorted by a small number of large transactions.

Within the commercial, industrial and other non-residential property market, investment patterns shift around as investment preferences move from one market segment to another. The changing investment preferences reflect the different drivers of each segment - white collar employment, retail sales, import/export demands and infrastructure investment. Also driving the popularity of different market segments for commercial property investors is the relative strength of the market different States.

Total commercial property sales volume fell 6% for $28.8 billion in 2004 to $27.08 billion in 2005. This was the second year of declining volume, primarily because investors moved away from the very buoyant retail and industrial property sectors to the office sector. While the residential market had begun to soften during that period, investors were still active in buying residential property, resulting in resources and capital for investment and development being attracted away from the broad commercial sector.

Investment in retail property is closely related to the viability of retail business, consumer expenditure and consumer confidence. Consumer spending drives the viability of retailers and their capacity to meet rent rises - a common arrangement in shopping centres is the linking of rents to retailer sales volume. Increased consumer spending also leads to increased demand for space by retailers.

During 2001-2003, high levels of consumer expenditure and consumer confidence worked together to drive the retail property market, resulting in increased investment, tighter yields and increased values. By 2005, investors had begun to move away from retail property to the under-performing office market. Investment in the retail property market fell 20% during 2005 to $6.81 billion. Investment in the industrial property market also followed the retail sector downwards. Investment in the office sector increased 10% to $10.92 billion, with the most improved market being in Victoria. However, there was a substantial fall in Queensland.

Office property is generally the dominant investment preference for commercial property investors. This was reinforced during 2005 with 40% of commercial property investment going into office property, 25% into retail property, 24% into industrial property and 11% into the hotel sector.

Despite predictions that consumer confidence would decline because of increased interest rate and oil price, the April 2006 Westpac-Melbourne Institute Survey of Consumer Sentiment showed consumer sentiment had improved 6% over the precious 12 months, providing renewed optimism for the retail property sector.

The strong global economy and increased business investment continues to boost the office property sector which is currently experiencing strong leasing demand and low vacancies. A recent Macquarie Bank report notes that rents in Brisbane and Perth have already shown significant growth. Rental growth is also being reported in the industrial sector.

This article is reprinted from our quarterly published "Financial Matters" Newsletter, Spring 2006 issue.

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