Sydney CBD Retail Property Market: Drivers, Government Regulation, And Consumer Confidence

Drivers of the Sydney CBD Retail Property Market

For a long time now, the Australian property market has been experiencing sustainable growth. As a result, today, Sydney is considered to be one of the cities with the most vibrant property markets. The city is characterized by various features that make its property market to be highly lucrative and attractive for both international and local buyers. Fundamentally, this occurrence is as a result of the city’s very stable political climate as well as its stable, resilient and growing economy. For these reasons, purchasing property from the city’s property market is a lucrative idea as it leads to substantial capital gains over the long term period. It should be noted that the Sydney property market has various segments among them residential real estate and non-residential or commercial real estate. One major segment of the commercial real estate is the retail property market.

In a nutshell, the retail property market in the Sydney central business district encompasses commercial properties that range from small neighborhood shopping centers such as small grocery stores, pharmacies, clothing stores and restaurants (Realty Mogul, n.d.). In addition, this property market also includes large superregional malls and business centers that a wide range of services (Realty Mogul, n.d.). What is more, this category also includes community shopping centers, specialty or fashion malls, outlet malls and power centers with big anchor stores (Realty Mogul, n.d.). Today, the city is characterized by the existence of a combination of these retail properties, situated at different locations throughout the region.

To a large extent, the existence, location and demand of retail properties in the region are influenced by the stable nature of the state’s economy as well as indicators such as consumer confidence level, buying patterns, and local household income patterns. Other major drivers include the current economic climate, government policy, interest rates, employment patterns, GDP, and world events. It is noteworthy that a combination of these drivers and indicators has a significant influence on the retail property market of this region.

To a large extent, government regulation acts as a major determinant in the retail property market in the city. The local and federal government influences the retail property market through its various legislations and policies on construction, leasing or purchase of retail property. It also influences the industry through approval and restrictions of retail ad commercial buildings, which then influences the supply of non-residential buildings in the property market.

Tax Policies

Government Regulation

One major means through which the government influences the market is through its tax systems and regimes. Notably, it has set various tax requirements on retail property in the state. For instance, retailers who acquire their premises of operations through renting have the rent as tax deductable (Australian Taxation Office, 2015). On the other hand, those who acquire retail property through leasing (as owners) are charged an income tax return equal to the full amount of the rent earned from the premises (Australian Government, 2016).  In the same way, commercial buildings used in the operation of a business are subject to capital gains tax, payable to the city or federal government (Australian Taxation Office, 2015). In this regard, the various tax policies have a major influence on the leasing, renting and purchasing of business premises within the Sydney CBD region.

Building Approvals

It is imperative to point out that the city and federal government have the power to approve or disapprove the construction of premises within the CBD. In turn, this significantly affects the supply of property available for leasing, renting or buying for the purpose of retail. In the past few years, the building approvals for non-residential sector have been varying as shown in the table below.

Source: (Australian Bureau of Statistics, 2017).

From the table above, one can note that the number of building approvals have been rising significantly since 2014-2015. More precisely, the value of non-residential building approvals during 2014-15 was estimated at 1,423,043,000 (ABS, 2017). In the year that followed, the value was estimated at 2,339,186,000 (ABS, 2017). As at April this year, the value of the approvals was estimated at 3,192,831,000 (ABS, 2017). Indeed, the trend indicates that there have been significant increases in the number of non-residential buildings in the country. Consequently, it applies that the supply of retail properties in the property market has increased gradually over the recent past.

The consumer confidence level also plays a big part in the Sydney CBD retail property market. Mainly, this is because consumers are the key drivers of any business unit. Thus, their confidence on the market determines whether or not the market is successful. To a large extent, the consumer confidence level in the city has been growing over the past few years. In turn, this has facilitated a consistent growth in the retail real estate of this region (Meyer, 2016). According to the Australian Bureau of Statistics, the consumer confidence level on the property market is expected to grow in the next few years. Last year, the consumer confidence level rose by 2.5 percent from 2015 (Meyer, 2016). This year, the indicator is estimated to have risen to 3.6 percent in October (Trading Economics). Notably, this is the strongest confidence level since the beginning of the year. In addition, the business confidence in the country has been estimated to be rising over time.

Tax Policies

Source: (Trading Economics, 2017).

Source: (Trading Economics, 2017).

It is important to point out that there is a positive relationship between the level of consumer confidence, business confidence and the retail property market in the city. Characteristically, a high consumer and business confidence in the market translates to high volumes of business in the city. In turn, this brings about an increase in the demand for goods and services by households and businesses in the region. Consequently, this promotes the need for business expansion and, thus results in a rise in the demand of retail property within the city. It is, therefore, worth noting that the significantly high consumer and business confidence has positively influenced the city’s retail real estate market.

Typically, the interest rate level plays a major role within any given market.  In the same way, the prevailing interest rate regime in the country greatly influences the level of business operations within the Sydney CBD retail property market. Ordinarily, property values fluctuate with changes in interest rates in the country. As a whole, the Reserve Bank of Australia has set the interest rate level of the country low for some time now (Trading Economics, 2017). In its October meeting, the monetary authority decided to leave the cash rate constant at 1.5 percent (Trading Economics, 2017).  In turn, this has made the cost of credit cheaper, allowing both households and individuals to have easy access to loans.

Graph showing the prevailing interest rate regime 

Source: (Trading Economics, 2017).

Generally, when interest rates are low, it encourages prospective retail property owners to enter the market. Mainly, this is due to the affordable credit facilities (Glynn, 2015). Therefore, those entrepreneurs who were previously unable to obtain loans can now have access to the same. What is more, those businesses that had limited access to the same can seek additional loans to expand their premises. Now, more firms have firms have funds to buy, lease or rent property in the retail real estate. As a result, therefore, one can argue that the low interest rates in the region has greatly boosted the demand for retail properties in the Sydney CBD as more firms can easily access loans, without a heavy burden of repayment.

It should also be noted that the low interest has pushed the demand for commercial properties upwards, thereby triggering the property value of these premises to rise. According to economic theory, a rise in demand for a given service or product brings about a subsequent increase in the price of the same (Glynn, 2015). Thus, since more businesses have money to demand for retail property, which is in limited supply, its price is pushed upwards (Glynn, 2015). Therefore, one notes that the current low interest regime has greatly contributed to the increase in value of retail real estate property in the country.

Building Approvals

It is also imperative to point out that the level of employment is another major driver of the retail property market in the Sydney CBD region. More specifically, the rate of employment within a given region determines the purchasing power of households and individuals within the area. For this reason, when the level of employment is high, households have more income to demand for retail goods and services. In contrast, when the rate of unemployment is high, households have limited income to demand for goods and services from retail firms. Hence, retail businesses have a limited customer base, which then forces them to reduce the demand for retail property in the region.

Unemployment Rate in Sydney

In economics, the rate of unemployment acts as a major indicator of the economic success of any given region. Indeed, the rate of joblessness indicates the proportion of the resident labour force that is willing and able to work, but cannot find employment. Therefore, a low rate of unemployment suggests that an area is affluent with a high rate of access to jobs. Contrariwise, a high rate implies that a region is experiencing a declining economy characterized by the closure of key businesses, industries, and retail premises to the disadvantage of the local populace.

 Source: (idcommunity.com, 2017).

As a whole, the rate of unemployment in the city of Sydney has been relatively high. In the March quarter, the rate of unemployment was estimated at 3.90 percent (“City of Sydney”, 2017).. Notably, this is a 0.14 percent drop from the December quarter’s 4.04 percent (“City of Sydney”, 2017). In Last year’s September quarter, the rate of unemployment was estimated at 3.82 percent, a significant drop from June quarter’s 4.35 percent and March’s quarter 4.36 percent (“City of Sydney”, 2017).  Thus, it can be noted that over the past year, the rate of unemployment in the country has been reducing slowly but gradually, thereby giving the hope that the rate of employment has also been rising gradually.  In effect, this implies that more households now have access to wages and salaries. Consequently, it follows that households can demand for more retail goods and service, which then boosts the retail industry. A boost for the retail industry implies a higher demand for the retail properties.

Local Employment

Just like the rate of unemployment, the rate of local employment is an important indicator that estimates the number of jobs within the city of Sydney. By and large, it indicates the size of the local economy, and its ability to support the retail property market. It should be noted that the number of local jobs within the Sydney CBD has been rising significantly over the past few years. For instance, in 2006, the number of local jobs was estimated at 459,405 (“City of Sydney”, 2017). In 2011, the figure rose to 522,055. Further, the number of jobs increased to 580,691 in 2015 (“City of Sydney”, 2017). As at last year, the statistic was estimated at 623,760 (“City of Sydney”, 2017).  Indeed, these figure indeed a consistent increase in the level of employment in the city. In turn, it implies that more households have more funds, which then, as explained earlier results to an increase in the demand for retail property within the region.

Consumer Confidence Levels

Employed Residents

Similar to the other two indicators, the number of employed residents is an important index of determining the economic success of a region. Typically, the greater the number of employed residents, the higher the economic prosperity of the city. Noteworthy, the number of employed residents within the city’s CBD has been rising gradually over the past few years (“City of Sydney”, 2017). More specifically, in 2006, employed residents were estimated at 105,216. Five years later, in 2011, the figure rose to 120,713 (“City of Sydney”, 2017). Another five years saw an increase in the number of employed individuals rise to 132,196 (“City of Sydney”, 2017). Last year, this value was recorded 135,905 residents (“City of Sydney”, 2017).   Indeed, it can be noted that as more individuals within the city’s CBD are gainfully employed, the retail sector grows. Eventually, it translates to an increase in the demand for commercial assets in the retail property market.

The Gross Domestic Product is also a major driver and indicator of the economic status of any given region. Noteworthy, the city of Sydney has one of the most robust and fast growing economies. Today, the city boasts as one with the fastest rates of economic growth in the country.  In 2014-15, the city accounted for about 30 percent of Australia’s total GDP (Wade, 2016). In the recent past, the region has exhibited a consistent rise in its GDP, indicating a vibrancy and economic success.  Notably, the relatively high level of GDP has brought about economic growth in the city’s CBD, thereby facilitating an increase in the degree of business undertaken in the region. Consequently, this has led to an increase in retail activity, thereby opening up demand for retail spaces in the CBD. More precisely, both small and big retail companies seek to start or expand their outlets, thereby increasing the demand for retail property in the region. In turn, the increasing demand in the non-residential property market has brought about a rise in value of such properties in the country.

The Recent Past

It is worth noting that the commercial and non-residential real estate sector has been in existence in the city’s CBD for decades. Over the years, the sector has grown gradually to what it is today. In the past, the industry was restricted and growth was minimal due to high rates of interest on loans for developing non-residential buildings within the country. Thus, its supply was also limited. In the same way, businesses could not access affordable loans from banks; hence the demand for expensive retail spaces in the property market was also limited. What is more, building approvals for the same was minimal.

Interest Rates

Current

Currently, the retail property market is picking up and growing gradually. Mainly, one can attribute this to the fact that the prevailing low interest rates in the country has made bank loans easily accessible to both developers and both potential and existing retail business owners. As such, developers can now access cheap loans to construct retail buildings, thereby increasing the supply. Besides, the government has since increase its approval rates of non-residential buildings in the region.  On the other hand, retailers can now increase their demand for these buildings in the country as they too can access cheap and affordable loans. In turn, this has facilitated a considerable growth of the sector.

The Future

It follows that the future of this sector is bright. More specifically, it is anticipated that the Reserve Bank of Australia will continue to maintain the cash rate constant and low over a long period of time. In turn, this is expected to boost and stimulate economic growth in the city’s CBD. Indeed, a sustained period of economic growth and prosperity will stimulate and increase the level of economic activity. In turn, this means that existing businesses will seek to expand their operations by opening up new outlets. In the same way, new businesses will be opened. Subsequently, the demand for retail buildings will rise and thus, the retail property market will experience tremendous growth.

The Recent Past

The non-residential retail property market in the city of Sydney has been performing relatively well on the property clock. In the recent past, one may argue that the CBD has been operating mainly at the 11^th hour of the property clock (Muddle, 2013). Mainly, this is because the market was experiencing a prolonged period of upswings in the market. It was characterized by a recovery period, with the property market approaching its peak (Matusik, 2014). What is more, the prices for property in the market were also rising gradually.

Current 

One may argue that the retail property market is currently at its peak. More specifically, the market is operating at the midnight hour on the property clock. Primarily, this is the case because the market is seen to have reached its peak (Harley, 2016). The prices of retail buildings within the CBD are significantly high. In addition, the demand for such properties is gradually outstripping the current supply (“Property Clock”, 2017). Thus, the value of property in the market is gradually rising, and is expected to continue up to the end of the year.

Future 

It is anticipated that in the near future the property market will be operating at 1 o’clock in the property clock. As such, at this time, it is anticipated that the market will be starting to decline. The demand for houses will also go down significantly (“Property Clock”, 2017). The rental returns for property owners will also decline substantially. Property values will also dwindle gradually within the region.

Conclusion

All in all, all factors considered, the Sydney CBD retail property market is operating at healthy levels. Currently, this non-residential property market exhibits prospects for growth in the near future ceteris paribus. However, fluctuations in the economic conditions of the city or financial status of its economy may significantly affect the growth of the property market. Regardless, the sector is generally healthy.

Reference List

Australia Tax Office. Buying commercial premises. [Online]  Australia Tax Office. Available at: https://www.ato.gov.au/General/property/property-used-in-running-a-business/buying-commercial-premises/ [Accessed 13 October 2017].

Australia Tax Office. Interest and penalties. [Online]  Australia Tax Office. Available at: https://www.ato.gov.au/General/Interest-and-penalties/ [Accessed 13 October 2017].

Australian Bureau of Statistics. (2017 Building Approvals. [Online]  Australian Bureau of Statistics. Available at: https://www.abs.gov.au/ausstats/[email protected]/dossbytitle/6647286D5517E834CA2570F10015ED94 [Accessed 13 October 2017].

Australian Bureau of Statistics. (2017). Building Approvals by Greater Capital Cities Statistical Area (GCCSA) and above  [Online]  Australian Bureau of Statistics. Available at: https://stat.data.abs.gov.au/Index.aspx?DataSetCode=BA_GCCSA [Accessed 13 October 2017].

City of Sydney (2017). Business and economy. [Online]  City of Sydney. Available at: https://www.cityofsydney.nsw.gov.au/vision/towards-2030/business-and-economy [Accessed 13 October 2017].

City of Sydney Building approvals. (2017). [Online]  idcommunity.com. Available at: https://economy.id.com.au/sydney/value-of-building-approvals [Accessed 13 October 2017].

City of Sydney Local employment. (2017). [Online]  idcommunity.com. Available at: https://economy.id.com.au/sydney/local-jobs [Accessed 13 October 2017].

City of Sydney Unemployment. (2017). [Online] idcommunity.com. Available at: https://economy.id.com.au/sydney/unemployment [Accessed 13 October 2017].

Finder. (2017). What is the property clock and how does it work? [Online] finder.com. Available at: https://www.finder.com.au/what-is-the-property-clock-and-how-does-it-work [Accessed 13 October 2017].

Glynn, J. (2015). Australia Cuts Interest Rates to Record Low. [Online]  The Wall Street Journal. Available at: https://www.wsj.com/articles/australia-cuts-interest-rates-1422935313 [Accessed 13 October 2017].

Harley, R. (2016). It’s midnight for Sydney and Melbourne on the property clock [Online]  Financial Review. Available at: https://www.afr.com/real-estate/its-midnight-for-sydney-and-melbourne-on-the-property-clock-20151108-gktym6 [Accessed 13 October 2017].

iPoperty. (2017). 2016 – 2017 Australian real estate market predictions. [Online]  iPoperty. Available at: https://www.iproperty.com.au/news/2016/10/18/2016-2017-australian-real-estate-market-predictions/ [Accessed 13 October 2017].

Matusik, M. (2014). Where are we on the property clock?. [Online] Michael Yardley’s Property Update. Available at: https://propertyupdate.com.au/property-clock/ [Accessed 13 October 2017].

Meyer, J. (2016). Consumer confidence jumps to highest levels in 2½ years. [Online]  Sydney Morning Herald. Available at: https://www.smh.com.au/business/the-economy/consumer-confidence-jumps-to-highest-levels-in-2-years-20160606-gpd4wy.html [Accessed 13 October 2017].

Muddle, G. (2013). How to navigate the property clock. [Online]  Smart Property Investment. Available at: https://www.smartpropertyinvestment.com.au/opinion/11415-how-to-navigate-the-property-clock [Accessed 13 October 2017].

Realty Mogul. Commercial Real Estate property Types. [Online]  Realty Mogul. Available at: https://www.realtymogul.com/sites/default/files/eBook-Commercial_Property_Types.pdf [Accessed 13 October 2017].

Trading economics. (2017). Australia Business Confidence.  [Online]  Trading economics. Available at: https://tradingeconomics.com/australia/business-confidence# [Accessed 13 October 2017].

Trading economics. (2017). Australia Consumer Confidence.  [Online]  Trading economics. Available at: https://tradingeconomics.com/australia/consumer-confidence [Accessed 13 October 2017].

Trading economics. (2017). Australia Interest Rate.  [Online]  Trading economics. Available at: https://tradingeconomics.com/australia/interest-rate [Accessed 13 October 2017].

Wade, M. (2016). Booming Sydney drives the nation’s growth. [Online]  Sydney Morning Herald. Available at: https://www.smh.com.au/nsw/booming-sydney-drives-the-nations-growth-20160214-gmtmj7.html [Accessed 13 October 2017].

Welcome to the City of Sydney Economic Profile. (2017). [Online]  idcommunity.com. Available at: https://economy.id.com.au/sydney [Accessed 13 October 20

Order an Essay Now & Get These Features For Free:

Turnitin Report

Formatting

Title Page

Citation

Outline

Place an Order