RATES & INFLATION

Last week our ever-prudent Reserve Bank decided to keep interest rates on hold at 4.1%. This was off the back of the June quarter, where inflation fell to 6% (slowing from 7% in March), falling short of the expected 6.2%. The fall in CPI can be attributed to cost decreases in domestic travel and accommodation, as well as automotive fuel, while the costs of most other goods and services continued to rise (ABS, July 2023). The interesting thematic in our economy at the moment is labour markets continue tightening, and hiring managers are busy, yet business and consumer sentiment continues to weaken. You can almost understand why the Reserve Bank is chasing its tail.

HOUSING SECTOR 

The housing sector continues to suffer the constraints of a construction industry struggling to acclimatise to limited labour supply, increased cost of materials and rising capital costs. Our vacancy rate sits at circa 0.9% while our population continues to grow at a strong 2.2% per annum, compared to 1.6% nationally. It’s hard to see how this accommodation crisis will be resolved. 

The State Government continues to incentivise and has recently announced a 50,000m2 land release at Northshore Hamilton which will provide 1,500 new homes, 13% of which will be for social and affordable housing. They also announced another 1,100 lots within the Caloundra South Priority Development Area. This is a drop in the bucket compared to the 380,000 additional homes required in Queensland by 2027 (Dept. of Housing).

OFFICE

Landlords are starting to breathe a sigh of partial relief as demand is picking up. Brisbane CBD and Inner City office vacancy rates have both compressed Quarter on Quarter to circa 12% and 15% respectively. With limited CBD supply over the coming years, more tenants want to engage with their landlord now or consider relocating while the rental rates are still low and incentives high. 

There has been a distinct shift in the office market, and investors are keen to position themselves now to ride the cycle. Flexible office space demand continues to increase along with the price per desk per month.

DEVELOPMENT SITES

As capital costs rise, lending policies tighten, and the availability of labour decreases, developers continue to focus on projects that offer holding income and a clear line of site to completion either via qualified pre-sales or an end user locked in before project commencement. Some developers appear willing to take a risk on their project exit strategy, provided they are developing into a buoyant sector such as PBSA & Residential Accommodation. 

Developer appetite for highly speculative developments has almost disappeared and will likely remain so until costs come back to earth or rents grow to make the projects feasible. 

YIELDS

The discussion around the appropriate risk-adjusted yield is intensifying each time a new data point is released. There remains a chasm between buyer and seller expectations in certain parts of the market, largely dictated by price-point. Sub $4 million industrial and single-tenant retail still achieve 4-5% yields. 

Larger retail, commercial and mixed-use asset yields are expanding to 6-8%, depending on an array of factors, including WALE, location, tenant quality and future use. We are seeing investors accepting low acquisition yields to secure reliable income with in-built rental growth, enjoying a higher yield over the long term. 

OPPORTUNITY 

We are in a market where investors can purchase significant multi-tenanted income producing assets at yields that have not been seen for years. If long-term reliable income is the mandate, there are quality options in most sectors. It is important to note that the “Real” interest rate, (Interest rate adjusted for inflation) is -1.9% based on 6% annualised inflation and the cash rate of 4.1%. 

Again, cash appears to be the worst performing asset class over a prolonged period and there is material benefit to investors with exposure to growing rents and appreciating capital values. 

Data Points to watch:

5/9 – RBA Rates Decision

6/9 – Aus GDP 

12/9 – Westpac Consumer Confidence Index

12/9 – NAB Business Confidence

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