By David Green-Morgan on February 19th, 2019
Co-authored by Jason Chan
Whenever a federal election in Australia is due, pundits, commentators and investors tend to ponder the impact that the outcome may have on the commercial real estate market. With one of the shortest electoral cycles in the developed world – a federal election every three years – potential volatility is never far away. As the next federal election set to take place before May 19, we decided to look at the behavior of the market during previous elections.
Based on the Real Capital Analytics database of Australian transactions dating back to 2003, we found little conclusive evidence to suggest that federal elections have had any material impact on the pricing, liquidity or transaction volumes in the commercial property market. However, the 2019 election has the potential to be one of the more significant in recent times with the Australian economy, business environment, residential market and currency already under pressure.
According to the opinion polls the next election is a forgone conclusion, with the opposition Labor Party set to win a landslide. One of their most controversial policies is to change the tax regime around residential investment and capital gains tax deductions which have remained untouched for a generation. This follows on the more stringent lending standards in the banking sector and the threat of more regulation and legislation to come.
The residential market in Australia has already reacted to this tighter lending and higher regulatory environment, with Sydney and Melbourne seeing house prices fall at their fastest rate in a decade.
Australia’s commercial property market has always been on international investors’ radars as it is regarded as one of the most transparent markets in the world, with historically healthy economic and real estate fundamentals. Australia has a large and liquid market with low volatility which is highly favored by global institutional investors.
Commercial pricing in Australia has also seen an acceleration in the last 12-18 months, with yields touching historical lows, a situation mirrored in the residential market back in 2017. Indeed, RCA’s latest Global Cities report showed that commercial prices in Melbourne grew at the fastest annual rate of any of the leading global markets in the final quarter of 2018.
While previous elections have had a limited direct impact on commercial transaction volumes, given the fragilities in the domestic economy the prospects of a correction in residential markets spilling into the commercial sector looks increasingly possible.
A change of government with a sweeping policy agenda, increased regulation resulting in a much tighter lending environment and a commercial sector operating close to record high pricing means that the 2019 election will be closely watched by all market participants.
The RCA CPPI Global Cities report is published quarterly. To learn more about the RCA CPPI and to sign up for reports visit rcanalytics.com. If you are an RCA client you can also access this report and conduct your own CPPI analysis on the RCA website.