The new financial year has kicked off. And while investors count last year’s profits before the taxman, it’s time to look forward. Commercial property investment generally moves in line with the economy, so investors’ eyes should be firmly on what it will be doing this financial year.
The 2019-20 financial year has begun and we’ve already seen some action. An interest rate cut was priority for the RBA and the re-elected Coalition government is hard at work to deliver income tax cuts. Meanwhile, certain sectors of the economy are bolstering but some commentators are still brave enough to utter the word “recession”. All of this is important for commercial property investors.
So, with 30 June behind us, what’s in store for the economy and commercial property this financial year?
Interest rate cuts
The RBA have already done it twice this calendar year. What’s to stop them doing it again?
The latest rate cut means the cash rate has been reduced by one-third since its long-held 1.50 per cent figure. Another rate cut this financial year, to 0.75 per cent, means that percentage will have been cut in half. That’s a big drop.
The reasons for these interest rate cuts:
- Lack of wages growth
- Non-existent inflation rate (and perhaps inflation mistargeting)
- Rising underemployment
Until these are in order, we’re likely to see another drop in the second half of 2019.
How might interest rates impact commercial property in Australia?
We’ve said it before: Interest rate cuts probably won’t help certain retailers and their landlords. Retail tenants need much more to generate the huge volumes of returns seen in the economic boom days because… well, see above reasons for low interest rates.
But it may spur some relief for Australians. Fear of the future can be overturned by good news like this, and it’s that confidence which may light the fire behind Australia’s economy. From little things, big things grow.
Rate cuts aren’t great for savers
While any effort to strengthen the economy is good news for property investors. Interest rate cuts aren’t welcomed by those with large bank deposits.
Even ANZ was quick to reduce certain deposit rates by the full 25 basis points on the same day of 2019’s first rate cut announcement.
Those with term deposits and savings accounts might understand compound interest, but they probably can’t earn it with these dismal deposit rates.
Leasing agents, agents and syndicators are experiencing an uptick in commercial property enquiry from deposit holders, and some of it is potentially a result of lower deposit rates.
Mining activity (and jobs)
Remember the glory mining days? An influx of blue-collar workers to WA, brand new jet skis on trailers and fresh tattoo sleeves on arms? Well, those days might be coming back.
Rio Tinto, BHP and Fortescue Metals Group – the big three iron ore producers – are all building new mines, with collective investment of over $10 billion.
For WA, this means jobs.
Iron ore prices have bolstered following supply chaos in Brazil. The surging iron ore prices have boosted Australia’s nominal GDP growth (which is up 4.9 per cent annually as at 30 June 2019) and with their largest global competitor faltering, activity for WA iron ore producers should continue.
How will mining help commercial property investment?
Mining can have big impacts on commercial property.
White-collar workers return to offices because mining and related businesses need accountants, business analysts, procurement teams, engineers and IT specialists. This boosts demand for office space in the CBD and fringe office markets.
And retail will certainly benefit.
The last mining boom triggered a spending splurge on “durable goods”. Spending on household items was 20 per cent higher than it otherwise would have without the boom. Food consumption was also up 20 per cent and motor vehicle sales were driven 30 per cent higher.
Another “spending party” could be on the way thanks to the mining sector, and the dance floor will be in retail properties.
New infrastructure (and more jobs)
The country has a dozen note-worthy infrastructure projects in the works, including:
- WestConnex underground motorway in Sydney ($16 billion)
- Sydney Metro ($12 billion)
- Melbourne Metro Tunnel ($11 billion)
- Melbourne to Brisbane Inland Rail ($9.3 billion)
- METRONET public transport program in WA ($1.84 billion)
Good things for the economy will come from these projects, most noticeably being workers. These projects create new jobs and grow the local populace. Both jobs and population directly influence the economy.
How could new infrastructure help commercial property investment?
Imagine all this new infrastructure but no new surrounding buildings. It’s difficult to because both go hand in hand.
Over the next decade, new rail projects alone will inject over $28 billion into Australian property development. This means residential property will be built for new inhabitants and premises for commercial use will arise in the surrounding locality.
Suburbs which have been previously underdeveloped will see some development action. This will almost certainly encourage re-gentrification in the areas these infrastructure projects pass through. Plenty of opportunity for new investment will arise as new supply comes online.
Income tax cuts
The re-elected Coalition government have been hard at work pushing income tax cuts through to low- and middle-income earners. Savings on their annual tax bills will be in the order of $1,080.
How could income tax cuts help commercial property investment?
Treasurer Josh Frydenberg wants to protect against further economic slowdown. Figures have shown growth for the year to the end of March 2019 was 1.8 per cent. This is the worst GDP percentage change since 2009.
The current GDP figures can’t create the new jobs and wages growth needed for our economy to bolster. But income tax will put Australia in a much better position for growth. Australians simply need more money in their pockets for this to happen.
The economy bolsters and businesses thrive. Commercial property tenants need a home and in a good economic environment they’ll reach into their treasure chest for a decent one.
29th year of economic growth
That’s right, despite the scares of low (I mean, nil) inflation for the year’s first quarter, it’s likely we’ll see yet another year of economic growth.
This is an incredible run for Australia. While the economy isn’t the strongest it’s been in the last twenty-something years, it remains resilient.
Chief Economist at AMP Shane Oliver says the reason we’ll avoid a recession is because of “desynchronisation”. When one part of the economy weakens, another picks up.
This explains the record-breaking stretch of economic growth. There are areas of the economy which are going strong (like mining in WA, some exports and non-mining investment), while others falter (most notably, east coast housing values).
So, the economic environment is quite dark for now. But there are irons in the fire to spur it along.
For more information on commercial property investment and how you can invest alongside us this financial year, get in touch today.