Businesses forced to close, downsize and offshore has caused vacancy rates to surge around the country, and rents to fall, yet commercial property prices continue to rise. This divergence has the central bank concerned the “risk of a large repricing” in commercial property is increasing.
The Reserve Bank of Australia wrote in its March 2015 Financial Stability Report, “The divergence between rising prices and falling rents in office and industrial, and to a lesser extent retail, property has widened further since the previous Review, with an associated fall in yields. As a result of these developments, the risk of a large repricing and associated market dislocation in the commercial property sector has increased.”
According to the central bank, the correction of commercial property prices has “been responsible for a number of episodes of stress in the banking sector.”
The central bank reports conditions in Perth and Brisbane are particularly weak with the plunge of commodity prices forcing drastic downsizing among the resource companies. Compounding the problem is a significant amount of new office space will come on line in the next couple of years, causing further pressure on the market.
Adelaide and Canberra are not far behind. In Adelaide, Property Council SA executive director Daniel Gannon says empty CBD office towers should be converted into residential apartments to arrest the spiralling commercial vacancy rate.
The central banks says a correction could be triggered by a number of factors, such as increased supply “that prompts a reassessment of valuations”, or a sharp fall in foreign investor demand caused due to rising global interest rates or adverse conditions in the investors’ home country.
» Financial Stability Review – The Reserve Bank of Australia, 25th March 2015.
» ‘How we’ll turn CBD offices into residential spaces’ – Adelaide Now, 26th March 2015.