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News release

Sydney

Australia’s Commercial Property Market Recovery on Schedule … Pace to Accelerate in 2011

Jones Lang LaSalle’s Q3/2010 Market Recovery Assessment and 2011 Outlook


SYDNEY, 29 OCTOBER 2010 – Jones Lang LaSalle’s assessment of the commercial property market recovery, based on September 2010 quarter data, is that the market recovery is running to schedule, with an accumulating range of  positive market indicators as the pace of recovery accelerates.
 
At an industry event in Sydney, Australasian Head of Research and Consulting for Jones Lang LaSalle, Dr David Rees, provided an Assessment of Australian Property Markets in 2010 and a 2011 Preview.
 
2010 Assessment:
Dr Rees said that against a broad backdrop of market recovery over the first three quarters of 2010, there was nevertheless a diversity of performance between sectors, state markets and between prime and secondary assets that had implications for all market participants – owners, financiers, tenants and developers.
 
“After a trough in late 2009, the market is now in its fourth quarter of recovery following one of the mildest commercial property market downturns on record.
 
“Jones Lang LaSalle’s Q3 market data shows that generally the pace of the recovery in 2010 has been rather stronger than was anticipated twelve months ago,” Dr Rees said.
 
“The record of past cycles suggests that the second year of a recovery cycle often shows an acceleration in the pace of activity and rental growth. Recovering demand, combined with a sharp fall in the construction pipeline in most markets puts the Australian market in a box seat for the second year of the recovery in 2011.”
 
Positive market indicators in Australian office markets as at Q3/2010 included:
• A fifth consecutive quarter of positive net absorption across CBD office markets: positive net absorption of 97,000 sqm was recorded nationally in Q3 compared with a ten-year average of around 60,000 sqm per quarter;
• Stabilisation of the national CBD office vacancy rate at 8.3% in Q2 and in Q3, probably representing the peak of the current vacancy cycle;
• This low vacancy peak suggests that rental growth will emerge quickly in the current cycle as demand for office space recovers;
• National office supply has peaked and the subdued outlook in 2012/2013 means a supply shortfall is looming in some markets such as Melbourne;
• Rental growth is emerging in some industrial markets and this, combined with early signs of yield compression has lifted prime industrial capital values off their cyclical trough;
• A recovery in retail turnover growth and consumer confidence, as well a reduction in the construction pipeline, is supporting retail rents while yields are stabilising across the regional, sub-regional and neighbourhood sectors.
 
“The stronger than expected market fundamentals are further confirmation of the sustainability of the recovery and are a reminder that opportunities are continuing to emerge for investors, owners, managers and tenants to position themselves for the upturn.
 
“Assets in most commercial property markets still appear to be attractively priced, based on their yield spread to the risk free rate.  Given the strong rental growth expectations in the next few years, the window of opportunity for investors is still very much open,” Dr Rees said.
 
2011 Outlook:
CEO of Jones Lang LaSalle Australia, Stephen Conry said based on the latest Q3/2010 market data, the assessment showed a commercial property market with positive turning points emerging earlier than anticipated.
 
“The outlook is for a return to rental growth over the next twelve months across most office markets. Rising rents, together with a round of portfolio transactions as institutional investors look to align their portfolios with their business strategies, is likely to see a recovery in the volume of sales activity through 2011.
 
“Recent leading economic indicators for Australia have been positive.
 
“Business confidence is up, but not unrealistically so, and the take up of office space is a sound indicator of this,” Mr Conry said.
 
“ABS employment figures for September were strong and showed that 360,000 additional people (almost 300,000 full-time workers) were employed in Australia in September compared to a year ago and business confidence was up sharply in Q3 in the NAB Business Survey.
 
“Jones Lang LaSalle’s September quarter national office statistics revealed that the demand for office space has exceeded expectations for this stage of the recovery phase and has the office market recovery continuing to gain momentum.
 
“Vacancy was historically low at the starting point of the up cycle and we will soon be seeing pressure on rents, enhanced values, and more developers becoming increasingly confident and active.
 
“All reports are that Australia is entering the biggest mining and energy boom since the 19th century.  The mining boom means Perth and Brisbane markets are likely to surprise on the upside.  Vacancy will peak well under previous expectations and longer term we expect to see a shift in capital allocations to those markets.

“Melbourne values are to grow strongest in the next few years, followed by Sydney.  In 2015 and beyond we expect that ranking to reverse, with Brisbane, Perth and Canberra continuing to strengthen,” Mr Conry said.
 
Dr Rees said the recovery profile during 2010 was clearly showing a diverse performance across the Australian commercial property market. 
 
“All markets boomed together from 2002 to 2007 and then declined in unison between 2008 and 2009.  But that close alignment is breaking up and the latest data seems to confirm our earlier prediction for the profile of the market recovery profile – a varied performance between the office, retail and industrial sectors and between state markets. 
 
“We are also seeing a narrowing of the spread between prime and secondary yields in office markets, which is unusual for this stage of the cycle. This probably reflects the impact of private investors on the market, as well as a reassessment of the likely levels and duration of vacancy rates in most CBD markets. 
 
“Some of the positive surprises in the recovery profile in Q2 and Q3/2010 have been the rapidity of the turnaround in the Melbourne office market, the early recovery in the level of activity in the industrial market and the stabilisation of yields in sub-regional and neighbourhood retail assets.
 
“With the Australian economic growth forecast to maintain momentum through 2011 and beyond, 2011 will deliver further evidence of the market recovery,” Dr Rees said.