CBA forecasts ‘volatile year’ for real estate

In its latest Property Insights report, CBA noted that the residential property cycle will ease this year while commercial real estate fundamentals will continue to improve, with each market and sector at a different point of recovery.

The CBA report noted that recent years have seen an unprecedented rise in residential development, driven by high-rise and high-density apartments.

“The extraordinary growth across the industry reflects a surge in investor activity and a significant shift to apartment living in all of Australia’s major cities,” it said.

“However, apartment development is likely to slow this year ― following a trend that emerged in the middle of 2015, when approvals started to drop. A decline in approvals is typically a signal the commencement of new construction activity will ease within six to 12 months.”

With fewer approvals, commencements have tapered, CBA noted, although they’ve plateaued at a high level.

“This is likely to see buoyant construction activity continue into 2017,” according to the report.

“During the next phase of this unwinding process, as projects are completed, fewer will commence to take their place. The overall effect will be an eventual reduction in development activity which is likely to then continue at a more sustainable level.

“Ultimately, this means some of the developments approved over the last few years will not proceed in this cycle. Owners may choose to sell those sites, providing an opportunity for others to develop uses more aligned to the changing demand-side conditions of 2016.”

Alternatively, CBA noted that existing developer-owners in these areas may look to purchase sites to consolidate properties and plan for projects in the next residential development cycle.

“While 2016 is expected to be a volatile year and one underpinned by an acceleration of change to property drivers, there is still plenty of opportunity to engage with the market,” the report said.

“The easing in high-density apartment development is likely to see an increase in the sale of sites once earmarked for residential projects. These sites may provide the opportunity to offer uses to service the market created by a fast-increasing population in these new high-density suburbs.

“Ideally, shorter-term uses in existing buildings may provide the option for more intensive development in the future, when the residential development cycle strengthens once again.”

In the meantime, CBA forecasts that the popularity of commercial property as an investment is set to increase further in 2016, amidst volatility of global and local financial markets.

The bank said challenge will be buying the right property at the right price and working to improve income returns into the short to medium term.

“While the larger cities offer greater short-term possibilities in this regard, buyers need to be selective elsewhere, as the timing around improvement in the fundamentals is less clear.”

[Related: Property prices fluctuate wildly across Australia]