It’s a big spending budget likely to fuel inflation, with market expectation the cost of funding will rise even more steeply than was previously the case. This will challenge those existing or prospective investors most heavily reliant on debt and properties where income is weak.
But the biggest impact on commercial property will be the stimulus it provides through the short to medium term in improving the underlying fundamentals. By this, we mean growing the occupier demand for commercial property, which in turn will result in more leased or occupied floorspace, less vacancy and a greater opportunity for owners to increase property value by generating more operating income or reducing operating costs, or both.
There are many, many initiatives and forecasts contained in the budget, but the most directly influential on the commercial property sector are summarised below:
Reducing unemployment to 3.75%
Growth in the workforce to lower unemployment will result in more leased floorspace, especially in the office sector, where vacancy rates, heightened by the pandemic, started to decrease in late 2021. The sector will now move into a faster recovery, despite any challenge from hybrid working.
Reducing unemployment also means more households will have more income, thereby boosting retail spending. This will result in stronger retailers as tenants and providing the chance for more leased space and less vacancy. In CBD areas, retail vacancy still averages a high 14%.
$8.6 billion cost-of-living package
This initiative will give an immediate boost to household spending and support retailers, particularly those in the non-discretionary or convenience sector.
Net overseas migration (including international students) to reach 235,000 by 2025
Returning net overseas migration to previous annual levels is critical to so many areas of commercial property. International students are essential to the residential/student accommodation rental markets and the general vitality of inner city areas of metropolitan and regional Australia.
Overseas migration traditionally accounts for the largest share of population growth in Melbourne and Sydney; it will be the catalyst to return population growth in Australia’s largest cities back to more typical levels. It will trigger a gradual rise in demand for new housing over the next few years.
Increased overseas migration will assist growth in the workforce across many industries, with the flow-on effects to commercial property noted above.
Strengthening local supply-chains
Australians are being urged to become more self-sufficient in domestic manufacturing, with a raft of funding initiatives announced. This will boost demand for industrial floorspace in an already strong market, where rents are surging up to 16% per annum in some submarkets. It has further potential to stimulate construction of new purpose-built manufacturing facilities in metropolitan and regional Australia.
Investment in transport infrastructure
An additional $17.9 billion has been added to the forward infrastructure spend, taking total commitments to $120 billion. For commercial property, this will help connect industrial areas with markets across Australia as well as open up new areas for business and tourism in regional Australia.
Its economic stimulus will be short-term, but its productivity benefits will be long-term.
Record funding for regional Australia
Regional Australia has done well from the budget, across many different programs. Everything from roads, rail, water and digital technology to export promotion funding. This will all serve to improve regional Australia over the long-run, as a place to visit, to do business and to live. It will increase commercial property demand and performance in these areas.