Australia’s south east property markets will continue to outperform in 2017, producing the strongest rental growth and the highest total returns according to new CBRE forecasts.

That is one of the predictions in CBRE’s newly issued Australia Market Outlook report, which analyses the risks and opportunities in the office, retail, industrial, hotel and residential sectors.

CBRE’s Head of Research, Australia, Stephen McNabb said property fundamentals were strongest in the office sector – particularly in Sydney, Melbourne and Canberra, given the outlook for net effective rent growth.

“The distinguishing factor is the outlook for rent growth of circa 8% in Sydney and Melbourne in the next three years,” Mr McNabb said.

In the retail sector, CBRE’s Outlook report highlights increasing headwinds, with only modest rental growth of between 1%-2% forecast across most retail categories.

However, the report notes that international retailers are continuing to target Australia and will have the capacity to absorb much of the space being made available by the closure of domestic retail brands.

“According to our retail brand database, more than 90 existing international retailers are looking to roll out stores across Australia over the next five years and another 50+ brands are looking at launching their first flagship store,” Mr McNabb said.

“Over the next five years, up to 1.2 million square metres of retail stock will be sought by international retailers, which will almost absorb the total supply pipeline and help fill space that may be vacated by discount department stores and other retail incumbents.”

Turning to the industrial & logistics sector, CBRE’s Market Outlook report forecasts that lower supply levels in 2017 will support rental growth, particularly in east coast markets where demand remains high.

Super prime rents are forecast to increase by 1.5% across Australia – with Sydney expected to deliver the strongest growth at 2% and Perth expected to be the weakest capital city market, with rents tipped to decline by 3%.

The report also highlights that as e-commerce becomes an increasingly prevalent part of the logistics sector, many developers are seeking to future proof assets to meet changing tenant needs.

“A number of new developments are being built with increased ceiling heights and tensile strength in flooring to ensure they are able to handle a high turnover of consumer goods, while older warehouses at the city fringe are being retrofitted to service last mile delivery,” Mr McNabb said.

“Automation is also fast becoming an important part of design considerations, with newer facilities being built accommodate the power requirements associated with robotics and 24 hour operations. Tenants are also increasingly seeking increased amenity with some logistics developments featuring child care, high quality cafes and access to public transport.”

In regard to the hotel sector, CBRE’s report highlights that the developers are expected to show particular interest in the Cairns and Gold Coast markets and that there will be a shift towards the great tailoring of guest experiences such as Accor’s Mama Shelter and IHG’s EVEN Hotels.

“In order to stand out from the crowed, operators are offering unique experiences to pique interest and capture market share, particularly from the millennial generation, and further this will drive further the further rollout of these lifestyle brands,” Mr McNabb said.

Across all sectors, the report highlights that the rate of yield compression for prime assets slowed in 2016, with the cycle expected to end in the second half of 2017.

It also notes that there is some evidence of investors shifting along the risk curve in terms of both the grade of property and locations they would target.

“However, on a risk/return basis, our near term forecasts lead us to expect that investors will retain a geographical preference for the lower risk markets of Sydney and Melbourne, with the former likely to be the only capital market to achieve total returns above the long term average,” Mr McNabb said.

“While Perth and Brisbane are seen as diversification plays, the near-term outlook for limited growth suggests investors will remain selective.”

Source: CBRE