SA better insulated from Australian housing downturn

South Australia remains better insulated from the downturn in the Australian housing market, with its diverse and steadily growing economic base providing a springboard for continued momentum in property markets. 

That was among the key outtakes at CBRE’s South Australian Market Outlook event in Adelaide, which highlighted the state’s resilience against both global and domestic economy uncertainty due to its lower but more stable economic growth trajectory. 

“While headwinds continue to face the Sydney and Melbourne housing markets, the Adelaide residential market is holding up pretty well – being one of just two capital city markets where house prices grew in the last quarter of 2018,” Mr Speers said. 

He also noted the continued benefits of South Australia’s growing defence, medical, engineering and resources industries. 

“The local industrial & logistics sector has rebounded really well following the cessation of car manufacturing in 2016. Underpinning that has been large scale infrastructure projects in addition to a lot of spending in the utilities sector,” Mr Speers said. 

“The exciting thing about the South Australian industrial market is the future. We haven’t even embarked seriously on the ship and submarine building programs, which are going to create a lot of blue-collar jobs, and the Australian space agency also holds lot of growth potential.”

Referencing the results of CBRE’s 2019 Asia Pacific Investors Intentions Survey, Mr Speers said on the investment front, Australian investors now preferred Melbourne over Sydney, while Asia investors still showed a preference for the New South Wales capital. 

He noted that buyers were looking to sell more, as well as buy more – creating more active liquid capital markets in 2019. 

“Most markets across Australia, including Adelaide, will record rental growth this year, which will continue to attract investment – both from domestic and offshore investors. South Australia in particular has always proven to be very stable in terms of economic growth and better sheltered from downturns, which will help to position it favourably from an investment perspective,” Mr Speers said. 

The research presentation was followed by a panel discussion with CBRE’s experts in the Adelaide office leasing, office investment, industrial & logistics, retail and residential sectors. 

Andrew Bahr, Senior Director, Advisory & Transaction Services – Office Leasing 

Mr Bahr said a recent spike in demand and activity in Adelaide’s office leasing sector was driving a major shift in the market, swinging more in favour of landlords. 

“Over the past six months, there has been a significant upturn in market activity, with some fundamental changes in key areas – incentives being one of them. After hitting lofty peaks of about 45% mid last year, they’ve declined to about 35% – and are still falling. Particularly in the best part of the market, which is just getting tighter and tighter and swinging around in favour of landlorda,” Mr Bahr said. 

With no real supply to come online until 2023, Mr Bahr said incentives would continue to decrease while rents would grow at a steady pace over the next two – three years. 

He noted that the coworking phenomenon gaining pace in other markets across Australia and Asia wasn’t likely to take off in Adelaide just yet.  

“Coworking isn’t just for startups, what’s actually driving occupancy is demand from large corporates looking for flexible and overflow space. The demand isn’t here yet in Adelaide, with those same groups tending to just absorb that space within their existing tenancies as the need arises,” Mr Bahr said, but adding that could change in the future. 

Ian Thomas, Director, Capital Markets – Office 

Mr Thomas said investment confidence was continuing to grow in Adelaide’s office market amid the state’s yield spread appeal compared to eastern seaboard markets. 

“We’re continuing to see more eastern seaboard investors active in the market, with Adelaide now seen as a key location for capital investment. With potential for some yield compression this year, and an unknown around a further interest rate cut, Adelaide is increasingly compelling from an investment perspective,” Mr Thomas said.

Julie Thomas, Manager Advisory & Transaction Services – Retail 

Ms Thomas said food & beverage continued to demonstrate signs of growth triggered by proactive licensing policy, 10% year-on-year growth in tourism and continued investment in public realm and tourism infrastructure. 

“While national groups haven’t been as prevalent in the market to date amid strong competition from our local operators, we have seen the entry or growth of a number of larger format restaurants into the Adelaide market, including Betties Burgers, Grill’d, TGI Fridays and The Bavarian,” Ms Thomas said.

She also noted that the introduction of small venue licenses by the South Australian Government in 2013 helped rejuvenate the Adelaide CBD as a tourism destination. 

“There are currently 105 small venue licenses in the market predominantly clustered around CBD laneways and the west end,” Ms Thomas explained.  

“The small venue licenses has also opened up a new avenue for restauranteurs, enabling them to diversify their restaurants with a wine bar and cocktail element to improve the dining experience for more mature patrons.” 

Ms Thomas said there was also an emerging trend of operators securing beachside locations such as Henley Beach, Glenelg and Brighton, which has been supported by strong tourism growth and a public realm investment.  

David Reid, Senior Director, Industrial & Logistics 

Mr Reid said growth in the state’s industrial & logistics sector was gaining momentum, following about 10 years of dormancy. 

“There are a lot of key drivers underpinning growth in the market – new users looking to setup last mile logistics spaces to cater for the online retail phenomenon, the healthcare and associated medical science sector, defence and the sustainable energy market,” Mr Reid said. 

He noted that current industrial stock levels and land supply couldn’t meet the strengthening demand in the sector. 

“We’ve seen very little construction in the industrial & logistics space for several years, which has created a shortage of stock amid current demand levels. We need more land supply – particularly in the inner-north and north-west, which are extremely tight,” Mr Reid said. 

Patrick McCarthy, Associate Director, Residential Valuations 

Mr McCarthy said Adelaide’s residential property market remained balanced, recording 3% growth in 2018. 

He noted however that an increasing supply pipeline of apartments meant developers would need to cater more for occupiers versus investors. 

In 2018, 300 apartments were delivered, rising to 950 this year and 1500 in 2020. 

“Adelaide apartments have generally been geared towards investors, but in the face of increasing stock, developers need to pitch more to owner/occupiers – providing stock that offers quality fitouts, larger outdoor/entertaining spaces and open areas.”