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House Views Report Newcastle & The Hunter Q3 2022
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Q3 House Views.
The Impact of Inflation on Property The current high levels of inflation have been caused by a combination of restricted logistics and labour supply (partly due to de-globalisation of trade) as well as some elevated spending coming out of COVID The stability of property yields to date is threefold. Firstly, a traditional flight to bricks and mortar during a period of uncertainty in the share market, secondly property is history’s hedge to inflation; and thirdly, the GFC’s lesson created a property market with high levels of equity that is far more resilient against rising debt costs compared to the high leverage markets of the 1990s and the GFC. In essence, as property is not as liquid as other investment classes, it tends to look beyond short-term volatility in the market.
Rising inflation can be beneficial to property rents, particularly assets with annual increases indexed to the Consumer Price Index. Knight Frank Newcastle’s view is that quality assets with secure cash flow should see their values hold, or potentially even increase, whilst secondary assets with existing vacancy or upcoming leasing exposure will experience a softening in value.
Welcome to Knight Frank Newcastle’s Q3 2022 House Views on the Newcastle and Hunter market. The changing economic environment driven by a combination of rising interest rates, rising inflation and general global uncertainty is set to have an impact on the local commercial property market. Whilst the industrial market remains buoyant, there are some headwinds in the residential development sector. Despite this, the foundation of the local economy remains strong with low unemployment, high coal prices, and a diversified employment base.
Economic Factors Throughout the third quarter, the Reserve Bank of Australia continued to raise interest rates by 50 basis points in both August and September. The Reserve Bank raised interest rates by 25 basis points in October with the RBA Cash Rate now sitting at 2.60%. Economists are predicting interest rates to rise above 3.0% during the first quarter of 2023 as the RBA focuses on compressing domestic inflation pressures.
The effect of rising interest rates has yet to see a significant impact on investment yields throughout the September quarter however limited transaction activity over this period has made it difficult to determine the impact of rising interest rates on commercial property yields. Knight Frank Newcastle is currently witnessing a lag between interest rate movements and any softening of yields, however enquiry rates have been impacted.
Matt Shaw Partner, Valuations & Advisory
Darby Plaza 352 Hunter Street, Newcastle
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Industrial Overview. • Despite the rising interest rate environment, recent transactions over the quarter in the Greater Newcastle industrial market indicate that yields remain steady. However, as the effects of rising interest rates begin to take hold over the coming months, there is the expectation that values will soften, those assets with good fundamentals (i.e. quality assets with secure cash flows) are likely to hold firm. • A tight leasing market, combined with a lack of available serviced land for immediate development, has seen the industrial market continued to remain strong over the September quarter. A recent transaction by Knight Frank Newcastle of 16 Channel Road, Mayfield West (5.2% yield) underpins the resilience of the local industrial market. • Secondary markets such as Mount Thorley, Singleton and Muswellbrook have witnessed an up-tick in transaction activity; the rising cost of debt, combined with limited stock available for sale in the Newcastle market, has seen higher yielding opportunities emerge in these markets
Industrial Market
Investment Yields
Market Rents $/m2 GLA
Improved Values $/m2 GLA
Incentives Vacancy Land Values $/m2
Beresfield
5.5% - 6.25% $120 - $145 $2,200 - $2,500
5% <3% $450 - $550 ↑
Thornton
5.5% - 6.5% $115 - $135 $2,200 - $2,500
5% <3% $300 - $400
Mayfield West
5% - 6% $130 - $165 $2,500 - $3,000
5% 5% - 10% $500+
Cardiff / Boolaroo Tomago
5.5% - 6.75% $90 - $130 $1,750 - $3,000
5%
<3% $500+ ↑
5.75% - 7% $90 - $120 $1,500 - $2,000
5% <3% $250 - $300
Heatherbrae (Kinross) Rutherford
5.75% - 6.25% $110 -$130 $1,750 - $2,250
5% 10% $380 - $450 ↑
6% - 7% $80 - $150 $1,350 - $2,650
5% <3% $200 - $300 ↑
Cameron Park
5.5% - 6% $120 - $145 $2,200 - $2,500
5% <3% $450 - $550 ↑
The figures in the above table assume a WALE of 5 years, 10-15% office component, 50% site coverage and an average land parcel size of 4,000m2. Leasing rates observed >1,500 sqm industrial warehouse.
106 Stenhouse, Cameron Park NSW 16 Channel Road & Part 4 Pambalong Drive, Mayfield West
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Office Overview.
• With a lack of transactional evidence, market feedback suggests that yields for offices have softened over the September quarter. • Despite this, assets with good growth prospects, e.g long WALE assets with secure tenures, are expected to remain steady and possibly witness capital growth over the next 12-24 months. • With a tightening labour market, employers seeking high quality candidates are trending towards offering flexible or ‘hybrid’ roles which include an element of working from home as a routine component of the employees working schedule. This shift has seen an impact space requirements for many businesses who historically have operated on occupancy ratios of 1:10sqm per employee.
Office Market (sub $10m)
Improved Rates $/m2 NLA
Investment Yields
Market Rates
Incentives Vacancy
A
B
A
B
A
B
5.25% - 6%
5.5% - 6.5%
$425 - $460
$325 - $360
$7,000 - $8,000
$4,000 - $5,000
15% - 30%
Newcastle CBD
15%
5.25% - 6%
5.5% - 6.5%
$350 - $450
$250 - $350
$6,000 - $7,000
$4,000 - $5,000
10% - 20%
Charlestown CBD
10%
The figures in the above table assume a WALE of 5 years.
SDkayrbRyePsliadzeance, 280 King Street, Newcastle NSW 352 Hunter Street, Newcastle
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Disclaimer. This report has been prepared for the private and confidential use of research/commentary. It should not, without the express written authority of Knight Frank Newcastle be reproduced in whole, or part, or relied upon by any other party for any purpose. This report is not intended to be used to provide financial advice, express or implied, and we confirm that the Knight Frank Newcastle Valuations and Advisory is not licensed to provide financial product advice under the Corporation Act 2001.
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