A subdued retail sector is weighing on Australia's commercial property outlook

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Confidence in Australian commercial property fell in the June quarter, weighed down by diminishing sentiment towards retail property.

National Australia Bank’s commercial property index fell by 4 points to 23, but remains above its long term average.

“While we continue to see the Retail sector suffering from constrained consumer spending and difficult retail conditions generally, it’s pleasing to see that sentiment for commercial property outside the retail space is well above the long-term average,” said NAB chief economist Alan Oster.

Positive sentiment in commercial property was driven by the hotel industry in Q1, but gains in Q2 were driven by commercial office space which helped to offset the fall in retail:

National Australia Bank

Retail sentiment dipped to its lowest level since 2014, as overall sentiment across the commercial property sector dipped slightly in the June quarter.

The dip in retail confidence “is in keeping with our outlook for household consumption given headwinds from elevated household debt and a continuation of subdued wages growth,” said Oster.

The fall in sentiment for hotels was likely reflective of the increased over-supply for that sector for Q1, when around 120 hotel construction projects were in the pipeline around the country.

Across the states, the biggest increase in confidence was reported in Victoria where the sentiment index rose to 41 — an increase of 24.

Confidence moderated in NSW, while Queensland and WA reported an improvement in sentiment.

National Australia Bank

In terms of the expectations for capital growth, office space in NSW and Victoria has the highest projected growth over the next two years.

Respondents also expect that rents will grow the fastest in the office space sector in those two states.

“Property experts also said the ease of obtaining debt is now harder than at any time since late 2011,” NAB said.

The latest survey is reflective of a shift towards commercial office space as Australia’s services sector continues to strengthen.

That’s offset against difficult trading conditions causing a murkier outlook for retail sector, and a pullback in sentiment towards hotel property as the construction boom passes its peak.

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