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Is The Australian Commercial Real Estate Market Going To Crash?

The boom in the Australian real estate market is not hidden from anyone and has been the talk of the town for long. Investors from within the country and foreign locations have diversified their portfolios by putting their money into commercial properties for higher returns. From high-rise office buildings to inner suburb warehouses, commercial properties have shown an upward trend in prices over the past few years. Melbourne, Perth and Sydney have been the big gainers in the race to earn more profits by commercialising more and more land.

An important factor behind the rise of the commercial real estate for sale in Australia is the low return rate on cash assets and housing plans. The returns from offices are at an all-time high in the current fiscal year with conglomerates making a beeline for state-of-the-art buildings touching the skyline and exuding opulence. The high-end properties are being rented out by blue chip companies which are shelling out millions of dollars to be spent on fancy office spaces. Foreign investments are further driving the prices up with cash-rich deals. In fact, Australia is the second most popular place in the world for investors to establish an Asia-Pacific headquarters. Increasing investment options with the development of inner-city suburbs as property hotbeds is another appealing proposition which is attracting more capital into the industry.

The outskirts of major cities are now becoming more viable investment options such as Paramatta and Melbourne’s city fringe, which have become busier than the CBD. With so much going on in favour of the sector, the cynics are trying to pull things down by repeating the adage that ‘what goes up comes down’. There are various concocted stories of the property bubble going bust in Australia. However, the good news is that no such disaster is on the cards. According to analysts, even if the prices drop by a few percentage points in some specific areas, it is not going to affect the entire country. Here are the top reasons why the Australian commercial real estate market will hang on even in desperate times.

 

1.  Increase In Retail High Streets

With a population boom in all major metropolitan cities and their suburbs, the number of residential properties and development projects have grown manifolds. Consequently, the demand for retail shopping strips and high streets have increased and will keep on amplifying in the near future. High-end shopping centres with amenities and conveniences like food and beverage outlets and other entertainment zones will be on the higher side as families visit these spots for a fun-filled day out on weekends or holidays. These strips will hold their ground against competition from e-commerce giants like Amazon as they would be anchored by high-end restaurants and pubs and other recreational shops.

 

2.   Not Exactly An Oversupply

The bubble usually bursts when there is a rapid increase in property prices and then a sudden downward spiral in values because of an economic shock like unemployment or oversupply. In Australia, the employment rate increased to 62.10% in June 2018, so this factor is negated. Coming to oversupply, there are certain regions where there has been oversupply, but in other areas, there is an undersupply which balances it out.      

 

3.  Sustainability of Lending Institutions

The lenders in the commercial real estate sector have a much lower incentive to pay back the loan as compared to housing mortgage. With a stable banking system emerging in Australia through the big names in the industry and Asian Banks making their presence felt in the market, the lending institutions are poised to survive a crisis with ease. The financial risk will be most likely felt offshore, and if there is a distress sale, the property can be easily bought by an established Australian business at lower rates.

 

4.  Diversified Occupations

It has been historically witnessed that regions which are dependent on one industry are more prone to a property bubble. For example, a town which is primarily dependent on mining sector may face the heat when the industry shuts down. However, most cities in Australia have now diversified and have plenty of industries working in every field of trade and commerce. The immigrant population is currently involved in a variety of professions which have changed the rules of the over-reliance game.  

 

5.  Restriction on Foreign Investment

A major reason for the surge in property prices is foreign investment primarily coming from Chinese nationals. The money was getting concentrated in Melbourne and Sydney and thus inflating the demand and subsequently the prices. To curb this rapid increase, the Australian government announced new regulations on foreign investment such as higher stamp duty in the 2017 federal budget. Also, the Chinese government has put restrictions on the amount of money that can be taken out of China by its citizens. This slump in foreign investment will dampen the prospects of an impending property bubble.

 

6.  Interest Rate Policy

The property bubble is a result of low-interest rates which remain low for a very long time. Though the interest rates in Australia are low, they have not been like this always. The banks have already increased the rates after the Reserve Bank and the banking regulator created stricter lending rules for property on retail banks to put a stop on irresponsible lending. This has affected the investors who now have to pay more than they were paying in the previous fiscal year. It is estimated that the pressure on banks would be amplified further when the global rates will go up.

 

7.  Global Policies

Many believe that Australia is headed towards a crash due to a property bubble just like the USA. However, others beg to differ and reiterate that the USA and Australia are two totally different markets. The lending rules are more stringent here than in the USA. A lot of hype about the bubble has been created by the media and those with a vested interest. If prices have dropped in certain areas, they have gone up in others. Australia is in much better control of its property sector than its counterparts and would not go that way.

 

Endnote

The naysayers want to create a blanket of uncertainty and fear in the minds of the investors. However, the picture is not as dark as it is being depicted by some segments. So if you are planning to buy commercial real estate for sale in Australia, you should not be worried as we are looking at a bright future ahead.