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)