Your Timing Within The Commercial Property Cycle

The traditional Investment Clock for SharesIF YOU have invested in the share market, you would most likely be familiar with the so-called “Investment Clock” — which attempts to show how the economic cycle influences equities.

In essence, an over-heated economy is followed by rising interest rates and falling share prices. Then, as the economy declines interest rates start to fall and share prices rise again.

Some analysts have tried to devise a similar “clock” for Commercial property. But unfortunately, the results have generally not been useful.

Commercial property has a number of sectors, which do not necessarily move in unison. For example, Industrial property prices may be sagging while Retail prices rise.

There are also regional differences as well. Prices might be hot in Sydney and lukewarm in Melbourne or Brisbane; or vice-versa.

Nevertheless, using a somewhat broad-brush approach, it is possible to place property within the investment cycle as follows:

  • The economy begins to slow
  • Direct property prices stop rising, and may decline
  • The authorities inject liquidity into the economy
  • The stock market and listed property trusts rise
  • The economy starts to recover
  • Direct property prices start to rise
  • Inflation may also rise
  • Interest rates rise
  • The stock market and listed property trusts fall

 Knowing exactly where you are in the Commercial Property Cycle is the key.To help give you a clearer picture for Commercial property, here are five key Phases based on economic and supply-demand factors.

Phase #1:

This is the bottom of the cycle, when the market is generally in a condition of over-supply — due to both a weak economy and too much new construction, from when the economy was still strong.

Vacancy rates may be high and rents falling significantly. Therefore, any new construction ceases; while demand slowly starts growing again, and the existing over-supply is gradually absorbed.

Phase #2:

Demand for new space continues to grow. But with little new construction, rents rise — sometimes quite sharply. This leads to developers once again to initiate construction of new buildings; until at some point, you regain a rough balance between supply and demand.

Phase #3:

Demand continues to rise; but supply is now growing faster, and rental growth may begin to slow down.

Phase #4:

The market is approaching a point of over-supply, due to over-building; with the situation perhaps aggravated by a weakening economy.

Phase #5:

Vacancy rates climb rapidly, causing rents and prices to begin falling. This leads to a general decline in investor confidence. And so, you re-enter Phase #1 once again.

As you can see from the graphs above, each main sector operates within a different time-frame for its cycle.

Historically, Offices have spanned around 18 years from “peak to peak”. Whereas, the Industrial and Retail cycles have tended to be about 9 and 6 years respectively.

Bottom Line: Obviously, the key is in knowing where you are in any particular cycle. Because, unusual influences (like the mining boom) can cause disparities for Commercial property, between the various capital cities.

However, for most cities, you are now in Phase #2 … with about 5 to 6 years to run before the current cycle for each sector peaks.

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