2022 IN REVIEW AND 2023 LOOKING FORWARD

RAY WHITE COMMERCIAL (WA)

2022 IN REVIEW AND 2023 LOOKING FORWARD

2022 LOOKING BACK

WA’s business and property sector started 2022 feeling optimistically following strong results in 2021. WA had managed the pandemic incredibly well, our local economy had not skipped a beat, we were expectant of open borders, interest rates were low and property prices had been restrained although on an upward trajectory since mid 2020.

By the end of the 1st quarter of 2022 this optimism was quickly replaced with uncertainty. Our premier backflipped on opening the borders, our reserve bank back-flipped on their promise to keep interest rates low, inflation spiralled, supply chains were interrupted, building costs spiralled, developers struggled with project cost uncertainty and viability, businesses grappled with staff shortages and with all this, sadly a number of businesses did not survive (most notably within the building and construction industry) causing flow on impacts.

And then of there is the terrifying geopolitical landscape.

But, in the face of these anxiety inducing matters, WA’s property market has fared well. WA’s median house price increased by 3.4% over the year, including a 0.9% increase as late as December, while the rest of the country experienced the sharpest fall in housing prices in 40 years. Our office occupancy rate reached 80% (highest in the nation), compared to Sydney, Melbourne & Brisbane only having occupancy rates between 52% and 67%. We are one of the tightest industrial markets in the country with a mind-blowing low vacancy rate of 0.2%.

Global uncertainty still prevails and some would argue that the worst is still to come, which is possible. The full effect of the increased interest rates is yet to be felt, with an increase or two still on the way. Consumer spending is only just starting to slow. The US & UK are teetering on the brink of recession and the war in Ukraine together with relationships with China are taking its toll

However, WA has a strong history of resilience in the face of these types of national & global head winds and the most recent data suggests this looks likely to continue. So then, should there really be concern for WA’s property market?

2023 LOOKING FORWARD

There is strong reason for the property industry to be optimistic.

There are compelling reasons for the Perth and wider Western Australian property industry to remain optimistic for the year ahead.

For the first time WA’s median weekly income is higher that NSW or Victoria while our overall cost of living is 21% cheaper than Sydney and 6% cheaper than Melbourne. This has resulted in WA having the second highest level of disposable income, second only to ACT. Yet, our median house price remain the second lowest in the country, nearly half of Sydney’s median house price and 25% lower than Melbourne’s.

2022 IN REVIEW AND 2023 LOOKING FORWARD

In short, West Australian households will hurt less with interest rate rises and cost of living pressures, than our counterparts in the East. Further, with a lower median house price and therefore a lower barrier of entry to buy a home, there is more potential depth in our market to see us through a tough period.

On the commercial investment front, WA has always enjoyed higher yields. For example, Prime CBD office yields in Perth were (as of Q3 2022) an average of 5.6% compared to 4.6% in Sydney and Melbourne and 5.1% in Brisbane. Regional shopping centre yields in Perth average 5.6% compared to 5.0% for Sydney, Melbourne and 5.3% in Brisbane. Large format shopping centres in Perth are roughly 7.0% in Perth compared with sub 6.0% across the eastern State. Prime Perth Industrial currently sits at 4.3% albeit within a broader range to 5.0% compared to Sydney and Melbourne which are achieving average yields of 3.8%.

It is somewhat difficult to believe that the cost of money will not impact WA yields to some extent. Funds and syndicators still need to offer returns that make sense to their investors and they are now competing against term deposits and bank bonds that are offering risk-free returns of over 4% and up to 5%. But given the generally higher returns available with Western Australian commercial property, it will be interesting to see how comparatively resilient pricing is.

Right now, at the coal face, it feels like we are in a transitionary period. Investors are wanting a better return, but sellers are sticking to their pricing. So, despite a general market expectation of an adjustment, we are yet to see a flood of transactions at significantly higher yields. We have seen a small adjustment in some sectors and transactions, but in contrast there have been a couple of recent transactions that indicate that yields have held firm.

For pricing to significantly buckle under market pressures, mortgage stress is required. But are we going to see significant ‘mortgage stress’ in WA? Significant enough to see an adjustment in pricing?

Since, the Banking Royal Commission in 2019, there has been an increased reluctance by banks to take possession of property. Between 2015 and 2019 (before the Banking Royal Commission), WA would see between 1,134 and 1,331 civil property possession applications to the Supreme Court. In the 2019/2020 year there were only 877, in the 2021/2022 year there were only 603 and we’ve only had 230 so far this financial year. (I chose to ignore the 2020/2021 year, as this was affected by COVID and was therefore not a reliable indicator).

Development site values in WA have remained stagnant and there is no doubt developers will continue to struggle with new project viability, as a result of increased costs and shortages in labour and materials. However, there are whispers of easing conditions, although this may take some time to filter through enough, to noticeably effect costs. We are though, depending on the asset, seeing owner occupiers pick up sites that no longer work for traditional developers.

Despite there being almost unanimous consensus that many developed counties will fall into recession, it’s not so certain that Australia will follow. Few economists are placing more than a 50% likelihood Australia will experience a recession this year. And given WA’s strong position within the Australian economy, there is probably little for us to be concerned about.

It certainly seems that we are starting to gain certainty heading into 2023. Beyond optimism there may even be room for confidence.

Written by Stephen Harrison, Joint Managing Director, Ray White Commercial (WA)