Rate rises to hurt commercial property players: NAB Commercial Property Index

Developers are cutting back as they expect tougher times, amid rising interest rates and inflation.

Rising interest rates and the difficulty of obtaining debt will weigh on commercial property well into next year with the National Australia Bank’s latest index showing that higher inflation was a rising concern.

The NAB Commercial Property Index, which surveys property professionals, showed more of them said it was harder to obtain debt or equity funding.

The number expecting debt and equity funding conditions to worsen in next six and 12 months was also sharply higher as concerns about banks and other lenders toughening up.

The number of developers planning to start new works in next six months fell to a three year low of 38 per cent in the second quarter, with below average numbers starting on residential, office or retail property. But with industrial supply still very limited, the number planning to start works in this sector remains above average.

Construction underway at Dexus' new office tower in Brisbane offering boutique office space for businesses.

The sector is dominated by listed giants including developer Lendlease, office group Dexus, industrial powerhouse Goodman and funds house Charter Hall.

The NAB Commercial Property Index eased by one point in the quarter amid reports the market is starting to respond to higher inflation and interest rates. The index was led down by a big shift in office sentiment and retail sentiment was also more negative, while industrial sentiment remained at high levels.

Market sentiment was lower in all states in bar Queensland and was neutral in NSW and SA and the NT, while it turned negative in WA and Victoria.

By sector, confidence on offices eased across the country, with a very negative outlook reported for WA and Victoria in the next 12 months, and remaining negative in Victoria in the next two years.

But retail confidence was higher in the eastern seaboard states, and industrial continued to outperform the broader market in all states.

Industrial capital growth is expected to outperform other sectors in the next one to two years, led by NSW but also tipped to grow in other states. The outlook for office values is now negative and wound back and falls are expected in all states bar Queensland, with Victoria weakest.

Property professionals expect retail to fall in all states, except SA and the NT.

Their outlook for office rents has also been pared back – Queensland and NSW are expected to outperform, with expectations weakest in Victoria. Retail rents expected to continue falling but at a slower rate, while the outlook for Industrial rents remains strong but was a touch softer.