Commercial crossroad

But despite underlying market health, a significant change in pricing could seriously rattle the industry, potentially driving investors to explore other asset-based options and turning buyers into renters.

This scenario worries Greg Preston, director of commercial real estate valuations company PRP Valuer.

"Sectors like the office market are very strong —particularly in capital cities on the eastern seaboard. Upward pressure with rates is becoming an increasing concern however," says Preston.

Preston believes small rate rises will be absorbed, but he fears significant increases could have a serious impact on the number of investors entering the commercial market.

Knock-on effect

Cathy Dimarchos, national manager of operations and business development with commercial wholesaler Sintex, agress.

While highlighting that Sintex remains unaffected by the current liquidity crisis — as its funding is sourced outside the capital markets — Dimarchos believes the flow on effects of increasing costs across the industry will become significant to all commercial lenders.

"The commercial lending landscape literally changed overnight. We can all expect the cost of credit to be an ongoing concern as markets tighten and lenders can't access funds at former prices," she says.

David Gouge, director of commercial lender Merchant Mortgages agrees that there will be re-pricing in the commercial sector but stresses that there is no cause for panic.

"The cost of funds overall is likely to go up. However anyone saying that the cost of commercial lending is likely to be more affected than other sectors is simply sensationalising," he says.

Reassessing risk

And while few relish the flow-on affects of the higher cost of funds, there may be a silver lining as risk in certain product categories can be revisited.

"Consumers need to be confident in the stability of the lending environment and some changes to pricing will actually have a positive impact on the strength of commercial lending in Australia —particularly where low doc and no doc loans are concerned,"says Dimarchos.

Low doc loans and no doc loans have come under review in commercial as well as residential lending in the wake of the US sub-prime collapse.

"I think we can expect to see low and no doc products move to a more appropriate risk rate —which should be welcomed by those serious about building the industry and protecting it from the menace of collapse," says Dimarchos.

Keep on trucking

For the time being, demand for commercial property remains strong.

Data reported in the Australian Property Institute Inc's September Australian Property Directions Survey has shown that growth in commercial property markets is expected to increase steadily over the next year as many of the nation's capital cities experience a commercial property upswing.

Survey respondents indicated that in one year's time there woud be continued growth in commercial property in Sydney and Melbourne; growth in the Brisbane commercial market however will be at its peak.

Fast forward to 2009, growth in the Sydney and Melbourne commercial property markets will be at its zenith, with Brisbane on a downswing.

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Perspective: mortgage manager

The Iden Group has offered commercial products for the past four years, distributed via mortgage brokers, making up around 10-20 per cent of the lender’s business.

Attracted to the commercial market through a desire to broaden its product offering to brokers, while servicing a greater proportion of the market, Iden Group funds its products via commercial wholesaler Sintex as well as through private channels.

“Commercial customers tend to be stickier and longer-term when compared to residential businesses,” says Iden Group’s director Barrie Gaubert when highlighting the advantages of his organisation offering commercial products.

According to Gaubert, the general office sector of commercial lending is currently the most active area of the market.
But Gaubert believes the market is also becoming more competitive. “The banks are making more products available to brokers, which traditionally they didn’t – even the small banks are getting in on it.”

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Commercial property performance: CBD offices Australia-wide

SYDNEY
* Rental yields ranging from 5.00 to 5.75 per cent on prime assets, reflecting initial rate of returns (IIR) from 7.75 to 8.00 per cent.
* Continued reduction in vacancy rates to 5.60 per cent.
* Market to tighten through to 2011, when bulk of new CBD developments become available, particularly in the East Darling Harbour quarter.

MELBOURNE
* Vacancy rate has fallen from 9.90 per cent 12 months ago to 5.50 per cent in August 07, on the back of the substantial net absorption supply additions.
* Fall in leasing options among premium and grade A buildings over the past 18 months.

ADELAIDE
* Vacancy rate of 6.60 per cent in July 2007 compared to 6.30 per cent in January 2007.
* Firming yields over the past 12 months, with average premium yields ranging from 6.50-7.50 per cent in the city core; second grade properties range from 7.50-8.50 per cent.

BRISBANE
* Record low vacancy rate of 1.20 per cent at 1 July 2007.
* Only three buildings with more than 2,000 square metres available in the CBD.
* Increase of 41 per cent over past 12 months in average prime gross face rents.