Australia’s Commercial Property: Focus on industrials but beware of dependence on USD funding

Australia’s commercial property has become one of the most globally integrated markets for f oreign investor participation. Being a rare developed market with high population growth, Australia offers relatively low-risk opportunities in international asset allocation. As such, a thorough analysis is vital for foreign investors. Below are our conclusions : Industrial will ha ve the best prospect supported by large public infrastructure investment and demand for goods from the economic transition towards consumption. With a low penetration of online retai l sales and digitalization potential , demand for warehouses and data centers is anticipated to accelerate . The outlook for office and hotel is generally stable . Office s will continue to provide op portunities but with lower yields . Resilient economic and employment growth ha ve support ed demand , but the large supply has compressed rental returns . Hotel s will benefit from strong Asia tourism demand with improved occupancy rate and accelerating revenue per available room (RevPAR). However, the large increase in supply in 2019 and 2020 will push return downward towards a more stable level . Retail is fac ing the most challenges given the weak private consumption and the rise of online shop s . Slow wage growth, worsened housing affordability and rising energy cost s are taking a to ll on consumer spending . This has led to poor rental growth and lower yield , pull ing investment out of the sector. Among different states, NSW has the best overall prospect and is well positioned to embrace the first wave of digitalization for demand in industrials, followed by VIC and QLD. But WA will face continuous headwind given the large suppl y and the double-edged sword in mining. Apart from demand and supply drivers, tighter funding condition is another important factor for Australian real estate, especially for projects with large reliance on USD funding . Alth ough ba nks managed to keep asset quality stable, they could tighten lending standard s as housing price s has begun to fall. W ith higher USD funding costs, Australian banks have already begun to transfer the extra costs by raising the prime rate, but the major risk of higher funding cost is more linked to a sharp increase in LIBOR. Overall, we remain cautiously optimistic on Australian commercial properties , especially for those projects which depend ence on USD funding.