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News release

Sydney

Property market downturn less protracted this time around

Office markets are likely to weather this downturn significantly better than in the early 1990’s cycle


SYDNEY, 23 APRIL 2009 – A new research paper by global commercial property services firm, Jones Lang LaSalle predicts the current property market downturn will not be as protracted in Australia as the previous downturn in the early 1990’s.
 
The White Paper titled “The Property Market downturn of 2009 – Just another market cycle or a whole new ballgame?” states that office markets are likely to weather this downturn significantly better than in the 1990’s cycle.
 
Dr David Rees, Australasian Head of Research at Jones Lang LaSalle said factors supporting the real estate market this time, which were limited or absent in the 1990’s cycle, included lower interest rates, supply and demand in balance, policy measures and capital flows from offshore investors.
 
“The 1990’s downturn took three years, from peak to trough.  In comparison, the current downturn is likely to last for two years, with capital values stabilising early in 2010.
 
“We can see evidence of the decline in values happening more quickly this time around, which of course means we will reach the bottom of the market faster and then recovery is possible.
 
“Factors that support a quicker recovery than last time include our low interest rates and the supply/demand equation is more in balance this time, resulting in limited risk of an over-supply in CBD markets.
 
“Compare this with the 1990’s when new supply continued to arrive in the office market for several years after the property market and the economy was in recession.  We are unlikely to see a repeat of this, as the majority of construction activity is currently on hold.
 
“Economic policy is also more supportive and is currently directed towards stimulating the economy, with the Federal Government expected to announce further stimulus packages in coming months.  Last time around the policy was aimed at slowing the economy.
 
“Vacancy rates in most CBD office markets are likely to peak in the 10% to 11% range during 2010, well below the vacancy rates of 20% and above recorded in the early 1990’s.  So we don’t see a replay of the early 1990’s when office values fell 45% in response to the increasing vacancy.
 
“Offshore investors are also continuing to be attracted to the fundamentals of the Australian market, which compares favourably to many offshore markets in terms of stability, transparency and the medium term investment performance,” Dr Rees said.
 
John Talbot, National Head of Capital Markets, said the Australian commercial property market was now twelve months into the downturn.
 
Property values peaked in March 2008 and have been declining steadily since then. In the previous downturn in the 1990’s, capital values declined by 33%, peak to trough, as measured by the PCA/IPD Composite Property Index.
 
“We are expecting capital values to plateau in March 2010.  Therefore there will be value movement over the next 12 months and probably a further decline of 10-15%.
 
“This means the next twelve months represents a window of opportunity to buy or sell assets, reposition portfolios, consider long-term investment strategies and prepare for the next phase of the property cycle.
 
“We are expecting to see more meaningful deal flow in the second half of 2009 - particularly as more distressed selling emerges and when more of the syndication rollovers start taking effect.
 
“Increased deal flow is likely to be seen in all geographies and investment grade sub asset classes (office, retail, industrial) as well as in the newer emerging asset classes such as pubs, retirement villages and aged care facilities as some of these new entrants retreat from the market.
 
“But in the main, prime assets will continue to hold up better than secondary assets as more of the ‘distressed’ selling is likely to occur at the riskier fringe end of most markets,” Mr Talbot said.