Asset class are a set of securities that have alike characteristics and behave similarly in the market as they are subjected to laws and regulations same in nature. The three main categories of asset classes are – equities or stock, cash equivalents and bonds or fixed income. In the real estate sector, the office properties are considered as the asset class which have certain key performance indicators based on which their market standing is ascertained. The learner has discussed the key performance indicator of the office space which needs consideration in determining the market position of the asset class.
The office market of Australia reflects the economy of the country in various ways. If more office space is rented or bought in Australia, then it shows that the asset class is developing and economy is growing. For example, because of low demand, there has been a rise in the rate of vacancy in the mining states of the country. Contrarily, there has been a decline in the rate of vacancy in the non-mining sector of the country. There are various key drivers, that lead to increase or decrease in demand of office property in the country. In 2015, the Reserve Bank of Australia had cut the interest rate to approximately 2.25 per cent to aid economic growth. Even though this had proved negative for cash investors, it has been beneficial for property investors and mortgage holders. Three key drivers that have a significant effect on office space have been analysed below:
Lower Inflation and Growth will lead to Low Interest Rates
The economic environment of the country has been constantly shaping the sector of office property. Since the growth rate, inflation rate and interest rate have remained low for the past few years, more and more people and business organizations have been making investment in the office space (Boyle and McGuirk, 2012). This is directly related to affordability, which is determined by the current prices of houses, profits of business organisation and interest rates. Thus, since the rate of inflation and interest rates are low, real estate capital has become the focus of the entire world. Commercial property transactions of more than $27 billion have been recorded in 2016.
This has gone down as compared to the previous year, because in 2015, the transaction amount of properties had been $33.74 billion. This change in 2016 was due to the increase in the rate of interest as compared to that of 2015. Since a combination of tight fiscal policy of the government, decline in the Australian dollar and extremely low rates of interest was present in 2015, several foreign investors had used this opportunity.
Figure 1: Office leasing activity of different states in Australia
(Source : savills.asia, 2017)
Strong Demand for Commercial Property
By the year 2014, the investment market of Australia started booming due to strong interest from the foreign and local investors. It is being anticipated by the experts of the real estate that need for commercial properties will rise in the year 2015 also. With increase in population and growth of the real estate sector and industry, more and more people will raise their demand for an office space.
In the years 2002 to 2009, an investment boom was noticed in the realty sector of the Australian market since the foreign demand increased. People were not in favour of buying office property in China as the interest rates were high there (Newell, 2010). Hence, a slowdown in the demand in China led to increased demands in Australia due to low interest rate and high supply capabilities. As per the recent statistics gathered, Melbourne has been able to provide proper and adequate supply to the investors however; Sydney is facing supply issues due to increased demand.
As per statistics gathered, 2014 registered the highest demand of foreign activities and foreign acquisitions resulting in 32 per cent of the total real estate transactions. The last quarter of the year had the second highest sales with a total recorded transaction of $28.1 billion.
Figure 2: Total transactions representing origin of the buyers
(Source: APN Property Group, 2017)
The total transactions which were recorded in the year 2014 in the office markets were $17.2 billion. The rise in transaction was a result of increase in the investment in the office property in the real estate (Higgins, 2010). The continuously increasing demand for the office property has led to an increase in the price of the asset values also. The demand includes both purchase and rental properties. Many consumers are looking for rental office space even though they can afford it. Hence, the demand and supply is fluctuating since a clear idea on what the actual demand is cannot be ascertained.
Property Markets Bringing Stable Rental Growth
The major growth in the office space market is coming from rental earnings. Due to high returns that have been coming from sustainable and strong rental earnings, business organisations having high amounts of cash in hand, have been seeking to invest in office space (Finkenzeller et al., 2010). This will lead to predictability and income stability for a long term. In 2016, approximately, office space of 1,796,314 square metres has been leased throughout Australia. The dominant sector who leased more than forty per cent of the stock is the community services and government sector (Higgins, 2013). Even though consumer spending and business confidence has remained weak for the past few years, the demand for office space has been high in most of the sectors, especially the supermarket and retail industry.
Figure 3: Office space leased by different segments
(Source: savills.asia, 2017)
With the increase in the investment in the office property of the realty sector, Australia is experiencing an economic boom. The worth of the asset class is increasing from the year 2002 after the interest rates of property in China increased. In this assignment, the learner has discussed the key performance indicators with respect to the three factors – lower inflation and growth leading to lower rate of interests, increasing demand for office property and property markets delivering steady growth in rentals. The factors discussed have helped in determination of the performance of the asset class in the market.