Irrational Economics

KS130069 (Small)Last month one of darndest things occurred in real estate that effects just about all who are trying to lease or sell commercial property. That thing was the massive increase in price to promote property online with a publicly listed real estate portal. For instance the Newcastle CBD listing charge went from $1,950 for a (3) month campaign to $5,655.  One explanation for the increase in prices that has been suggested to me was the company’s value went from $500 million to $5 billion due to the share market support – so in order to
substantiate the share markets value they have had to increase the prices across the board.

STOP RIGHT THERE! THINK ABOUT THIS! IN ORDER TO SUBSTANTIATE THE SHARE MARKETS VALUE A COMPANY HAS INCREASED THEIR PRICES!

What!?! – a company due to an artificially inflated share market (which is due to ridiculous amounts of cheap money flowing around the world from quantitate easing) is trying to reflect the share markets perceptions of value into the pricing of the commodity it produces in order to re-justify the share markets perception. Am I not in touch with the
new reality, or is the new reality out of sync with the fundamental nature of economics. Are we now looking at a world of Irrational Economics?  As a region we are experiencing some
IRRATIONAL ECONOMICS fundamental or rational market forces as the employment layoffs continue due mainly to the slowdown in mining and manufacturing sectors. This is causing an increase in supply of industrial and commercial buildings.  Combine this increasing vacancy rate with a declining demand and this is in turn means the time taken to lease or sell buildings is increasing. According to the Hunter Valley Research Foundations Hunter Region Indicators June 2014 edition;

“Businesses, on balance, expect regional economic conditions to worsen in the next (3) months. This is not surprising given consumer demand remains weak and the labour market is stagnant and may weaken further before the regional economy recovers. The outlook for the Hunter economy remains subdued.  In the near term, the risks of reduced demand for Hunter exports, and of fiscal consolidation, may outweigh the stimulus of new infrastructure investment, possible improvements in residential construction and efforts to increase productivity”

Industrial sector

Overall we are experiencing growing vacancy factors as businesses close or down size and many landlords are now offering incentives or reduced rents in order to attract the few
tenants out there. Hardest hit are buildings over 2000m2. Activity for smaller industrial is still consistent with a growing demand for the purchase of buildings up to 500m2.

Commercial sector

The CBD is experiencing the same growing vacancies as the industrial sector. This is mainly due to the downsizing of the consultancy firms who supply services to the mining and construction sectors. Again there is a steady supply of tenants for well priced smaller space and the owner occupier buildings in the city are proving a very popular item to buy.

Investment property

Commercial and industrial Income producing property is an attractive investment alternative to leaving money in the banks or risking it in the share market. With yields in general remaining in 8% to 10% range there are advantages to these properties provided you maintain your tenant.  Looking forward the Region would seem to be in for some tougher times as it adjusts to the structural changes that are occurring within our local
economy.

by Steven Dick
Raine & Horne Commercial Director

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