Welcome to the Q2 2023 edition of Banner Asset Management’s Quarterly Property Report. A combination of cyclical and structural factors drove the performance of the local real estate market in the three months to June 30 as it adjusted to economic conditions and the lingering consequences of the pandemic.

Residential property continued to rebound in the face of rising interest rates, primarily as a result of continued supply issues and resurgent migration. The pace of the gains, however, began to slow in June – perhaps as a sign that rate hikes had quelled buyer confidence.

In commercial real estate, Australia’s industrial and logistics property remains a standout with the lowest national vacancy rate in the world. The outlook for the sector remains generally favourable as vacancy rates are expected to remain low for the foreseeable future. The local office market is facing similar headwinds to other countries but prime space continues to provide relatively solid results. The Brisbane CBD market, in particular, remains a standout performer in terms of rental growth.

In our Spotlight section, we take a look at the future of petrol stations as a result of the uptick in local electric vehicle (EV) sales. The available evidence suggests the full transition to EVs will likely take 30 years or so – and that petrol stations consequently continue to be a viable property investment. Petrol station owners are also diversifying their operations beyond fuel to include services such as food and convenience shopping, in a move which will complement their potential adoption of EV recharging facilities.

We hope you find these insights useful.

Australia’s economic growth continues to moderate with the latest official figures showing gross domestic product (GDP) grew by 0.2% in the three months through March, and 2.3% compared to the same time last year ¹.

It was the sixth straight quarter of economic growth but also the weakest quarterly growth since the COVID-19 Delta lockdowns in the September quarter of 2021, according to the Australian Bureau of Statistics (ABS).

Domestic demand was the primary contributor to GDP growth, while net trade detracted from growth (as imports rose more relative to exports).

The Reserve Bank of Australia (RBA) paused interest rate hikes at its April meeting but immediately recommenced raising rates in its two subsequent monthly meetings, pushing the official cash rate to 4.1%.

The central bank then paused rate hikes again in the first week of July, with RBA Governor Philip Lowe noting the “4 percentage point increase in official rates since May last year was working to create a more sustainable balance between supply and demand in the economy and will continue to do so².”

However, he also indicated the RBA was prepared to resume rate increases if economic conditions warranted it and reiterated the board’s priority was to return inflation to target within a “reasonable timeframe”.

“Some further tightening of monetary policy may be required to ensure inflation returns to target in a reasonable timeframe, but that will depend on how the economy and inflation evolve,” Lowe said in a statement accompanying the July decision to pause rates.

Monthly data shows headline inflation rose 5.6% in the 12 months to May, which was the smallest increase since April last year. While prices kept rising for most goods and services, the increases were smaller than those recorded in preceding months, according to the ABS.³

Governor Lowe also noted in his statement that wages growth had picked up in response to a continued tight labour market and high inflation.

“The board remains alert to the risk that expectations of ongoing high inflation will contribute to larger increases in both prices and wages, especially given the limited spare capacity in the economy and the still very low rate of unemployment,” he said.

The RBA’s expectation is the economy will grow as inflation returns to the 2-3% target range, but Lowe again said the “path to achieving this balance is a narrow one” – in a mantra the central bank has adopted for some time now.

It was the highest quarterly rise since January last year, according to CoreLogic, though national prices remain 6% below the previous high recorded in April 2022¹.

The ongoing lack of supply has created an environment favouring sellers, with capital city listings in the four weeks ending June 25 almost 20% lower than the same period last year².

The overall pace of capital gains eased in the month of June, perhaps as a sign that sentiment was falling as interest rates bite.

Darwin was the only capital not to record a gain in the quarter, while regional housing values grew at a slower pace than major cities³.

In May, over 15,000 total dwellings were approved, a 20.6% increase from April but still 9.8% down on an annual basis¹.

National Australia Bank’s Chief Executive Officer, Ross McEwan, called for urgent action to accelerate housing supply in an appearance before the House of Representatives Standing Committee on Economics in early July. He stated there is a “chronic undersupply of housing” and that “fast-tracking planning permissions and development would be the single most effective way” to reduce pressure².

A forecast increase in Australia’s net overseas migration to 400,000 this financial year – 27% above the previous record set in 2008 – will create even more demand for housing. That demand will initially be felt in the rental market but ultimately extend to owner occupied property as permanent migrants purchase their own homes, according to CoreLogic.

Overall, the National Housing Finance and Investment Corporation expects the gap between supply and household formation to burgeon out to -106,300 dwellings between 2023- 2027 as a result of rising material costs and supply chain issues³.

There are early signs annual growth in rent is easing across the combined capitals but it remains high versus previous years, reaching well into double digits for units in major cities and hovering around 10% for houses.

Increased migration was a major factor in annual rent appreciation for units, which reached as much as 18.8% in Sydney in the year to June 30. Perth clocked up the biggest annual increase in rents for houses (13.1%) and Melbourne followed with a 10.6% gain¹.

Rental vacancy rates across the combined capital are also rising (to 1.1% on June 30) but, nonetheless, remain well below the decade average of 2.8%².

CoreLogic argues an increase in the size of the average household in response to rising costs means rental appreciation will moderate further over time.

With most markets around the country recording severe supply shortages for warehouse and industrial premises, vacancy rates continue to reflect extremely tight leasing conditions. According to CBRE, Australia’s industrial and logistics sector has the lowest national vacancy rate in the world, while Sydney’s vacancy rate, at 0.2% for the first half of 2023, is the lowest of any city worldwide¹.

Persistent undersupply is likely to keep vacancy rates at very low levels for the rest of the year, but there are early signs that rental markets may be beginning to relax. JLL reports some companies have started subleasing warehouse space that now are surplus to their requirements as supply chains return to normal following disruptions due to pandemic restrictions¹.

Leasing inquiry levels have also returned to normal after reaching record highs in 2021 and 2022, according to Colliers, although it notes that an extra 2.9 million square metres of vacant space would be needed before market rental growth was affected1.

As the market stands, rents have risen 5.3% over the second quarter of 2023, and 40% over the past 18 months, according to Colliers research reported in the Australian Financial Review².

With rents rising and vacancy rates tight, capital values for prime industrial property increased 3.6% nationally over second quarter to $3420 per square metre, while yields rose 18 basis points to 5.27%, the Australian Financial Review reports³.

As in previous quarters, most stock under construction is pre-committed, meaning supply shortages are unlikely to abate for many months to come.