Driven by different economic factors, investment into commercial and residential developments tends to follow a cyclical pattern. Tracey Cook examines how the current development market is faring.
PROPERTY development is reactive to the marketplace and myriad economic factors play a part in dictating what development type is dominating the construction market.
In today’s market climate it is residential development and commercial retail that is forging ahead.
In contrast to the late 1980s and early ’90s when the market was booming, today the commercial office development market is barely moving.
This is partly to do with the oversupply of office space built in that era but also be-cause of the more stringent financing guidelines that came to the fore after the WA Inc saga, according to Property Council of WA executive director Joe Lenzo.
“In the CBD market it has nearly been a decade since there had been a commercial development of any size,” Mr Lenzo told WA Business News.
He said the tightening of the industry after the WA Inc period meant that financiers had to be stricter about levels of pre-commitment and economic lines.
The more stringent guideline has made it harder for individuals and smaller organisations to get developments off the ground.
“In the last five years investment in commercial property is coming from the big institutional investors and listed property trusts,” Mr Lenzo said.
About 98 per cent of all retail and office space is leased, however this may soon change if moves to strata title commercial office developments gain market acceptance.
Mr Lenzo said commercial office developments on the east coast were starting to be developed with strata titles.
“Currently it is an acceptable way to finance residential, it is not yet an acceptable way to finance commercial office developments,” he said.
“It is the sort of approach that suits some companies and not others.”
Mr Lenzo expects to see strata titles on commercial office developments in WA in the medium-term future. In residential development there are far more opportunities for individual high wealth individuals and organisations to get into the market.
Jones Lang LaSalle associate director John Williams said residential development, particularly inner-city multi-residential developments, were an investment target because developers could sell the product at a higher rate per square metre than office developments.
Mr Williams said he expected the office market would improve, with the potential for office developments in Osborne Park, Innaloo and Burswood.
Driven by strong domestic demand for goods, the commercial retail development market has been performing well over the past couple of years with numerous bulky goods and showroom developments and shopping centre refurbishments going ahead.
Mr Lenzo said there had been an exponential growth of retail demand over the past three to four years, allowing for increases in retail space rent and, as a result, better returns for investors.
“Retail tenancies are strong, rents are strong and retail is strong,” he said.
Demand for quality retail stores remained high, he said.