Historically low interest rates, rapid population growth and immense volumes of foreign capital characterised Melbourne’s commercial property market throughout 2017, with “extremely buoyant conditions” across almost all sectors.
Below we have highlighted the “biggest winners and losers” of the city’s property landscape in a comprehensive end-of-year wrap-up that covers everything from foreign capital to the Amazon effect.
2017 was a triumphant year for CBD, city-fringe and suburban office markets; childcare centre investments; CBD retail, inner suburban residential development sites suitable for owner-occupiers and empty-nesters; townhouse sites anywhere; and sites suitable for development of aged care or childcare facilities.
Perhaps the most interesting shift in the market this year was the wide-spread acceptance of childcare properties as a low-risk investment class, with yields falling sharply as investors clamoured to secure such assets.
By contrast, large format retail investments took a hit, with Amazon’s imminent entrance dinting investor confidence, as did development sites suitable only for investment-grade apartments, due to the banks’ and Australian Prudential Regulation Authority’s crack-down on residential property investment markets.
Overstated withdrawal in Chinese investment
We believe that the market commentary and media noise about the large-scale withdrawal of Chinese investment from the Australian market, primarily as a result of Chinese government capital controls, has been overstated.
While there has been a detectable decrease, the importance and impact of Chinese capital remains profound throughout most Melbourne property markets. The impacts have been more pronounced in major markets dealing in the hundreds of millions of dollars, rather than markets below $100 million, where Chinese capital liquidity remains very high.
We see Box Hill as Ground Zero for Chinese investment into Melbourne; this suburb serves as a clear demonstration of the sudden transformation that can occur within a local market when rapid population growth combines with demand from Asia and planning support.
Chinese developers swooped on Box Hill this year, snapping up more than $200 million worth of sites to redevelop for residential projects.
In the coming years, Box Hill’s population is anticipated to swell by many thousands of people as projects are completed, providing significant infrastructure challenges for local and state governments.
Integrated shopping centres
Savills Melbourne has also witnessed a trend of shopping centres seeking to adapt to the changing use of land and the changing retail environment, by building upwards.
The Glen in Glen Waverley, which is having 600 apartments in multiple towers added following the sale of the air-rights to Jeff Xu’s Golden Age Group, and Box Hill Central Shopping Centre, which has applied for planning approval to add apartment towers above.
We expect this to be an ongoing trend, as shopping centre owners seek to integrate living, shopping, and entertaining into their centres, while maximising typically huge and strategically located landholdings.
A look at the Amazon effect
In addition, the “Amazon effect” will prove to have less of an impact on Australia’s retail markets than some commentators and investors believe.
Amazon will out-compete the weaker retailers of certain commodity-style goods but will not cut a swathe through our market as some seem to fear.
Amazon has a 3.5 percent share of the retail market in its home country of the US and, due to the geographical and logistical challenges of Australia, is unlikely to secure that level of marketshare here. There will remain ample room for agile retailers to compete and prosper.
As commercial land values continue to rise sharply into 2018, the future impact of escalating land tax and other property taxes would take its toll on owners of under-developed properties and businesses.
We anticipate this will be most keenly felt by those with a business model requiring large landholdings, such as car yards, suburban pubs, reception centres and function venues, petrol stations in residential areas, car-parking docks and freestanding gyms.
These types of businesses will increasingly struggle to justify their occupation of large or valuable landholdings, and owners will continue to choose to sell to developers as land taxes erode total incomes from such properties.
Anyone opposed to the prolific suburban development and changing urban landscape, should really be opposed to the enormous land taxes that are forcing owners to sell up to developers.
Overall future outlook
Looking to 2018, the strong population growth and continued low interest rates will bode well for Melbourne’s property. It will be a simple case of onwards and upwards for Melbourne commercial property markets in the new year.
The growth trend is inevitable baring outside global shocks, such as an escalation by North Korea, or tensions in the South China Sea.
We envisage the “tsunami” of money pouring into the Melbourne market will continue, and strengthen with time, as Asia’s wealthy became more numerous and they continued to seek to migrate their wealth from their countries of origin.
Australia has a virtual regional monopoly on high livability, social and cultural acceptance, economic stability and freedom to invest – and this is all while being a single flight away from most major Asian cities, and in a similar time zone.
Long term, absolutely nothing will stop the sheer weight of Chinese and Asian money from having an ongoing, profound and inflationary impact upon all Australian property markets.
Melbourne will be one of the most impacted by virtue of factors such as our perceived livability, relative affordability compared to Sydney, high standard of education facilities, and ‘Asianisation’, with 36 percent of our population born overseas.