Implications for Commercial Property Managers due to Structural Change in Australian Economy

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Current and future implications for commercial property managers due to structural change in
the Australian economy.
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Executive Summary:
As a Property professional, developer, investor or manager it is essential to hold adequate
knowledge of the ever-changing property cycles, across all markets. By examining and
gaining knowledge based upon previous errors made by past Governments, financial
companies and banks property enthusiasts are able to view the potential of property
worldwide. It is clear that the decline in the economic domain can directly affect property
markets, while growth within the economy can achieve benefits to property.
During the period of the second quarter of 2007 until early 2009, the Global Financial Crisis
(GFC) occurred shaping various markets around the world resulting in iconic events of
economic history. While a financial crisis primarily results in negative issues, society has
arguably learnt drastically with regard to ideas relating to investment, risk, finance, banks and
greed. A major factor that led to the GFC stemmed from sub-prime loans in America that
caused significant economic decline and were seen to have a significant effect on most major
countries worldwide. The Australian property sector was significantly affected during the
period of the GFC with direct regard to declining market rents, increasing outgoings and
rising vacancy rates. This is identified through the case study ‘18 Smith Street, Parramatta
NSW’ found within appendices to be a small insight into what is the larger scale of office
property. Australia’s office property sector can be broken down into three levels of scale;
Premium, A Grade and B grade.

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Table of Contents
Executive Summary:..................................................................................................................2
Introduction................................................................................................................................4
1.1History of the Global Financial Crisis:.............................................................................4
1.2 The causes of the GFC.....................................................................................................6
1.3 How the GFC unfolded....................................................................................................8
Literature review........................................................................................................................8
2.1The GFC’s impact on Australia:...........................................................................................8
2.2 The GFC and impact on Australian Bank Risk................................................................8
Discussion................................................................................................................................11
3.1 Sydney Office Property, Vacancy Rates:.......................................................................11
3.2 Sydney Office Properties, Market Rents:......................................................................14
3.3 Sydney Office Property outgoings levels.......................................................................16
3.4 Future forecast for Sydney Office Property...................................................................17
3.5 Preventative Strategies for commercial Property Managers:.........................................18
Conclusion...............................................................................................................................20
List of references......................................................................................................................22
Appendices:..............................................................................................................................25

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Introduction
It is important for commercial property investors, managers to hold sufficient knowledge on
the changing property cycles. They can only achieve this by assessing the errors made by
banks and past government to view the potential of property in the entire world. From
assessing these errors, it is clearly shown that any drop in the economic domain directly
affect property markets. The GFC that happened between 2007 and 2009 shaped many
markets in the world resulting in a major event in the economic history (Kindleberger and
Aliber 2011, p.35). The GFC results had the sharpest and largest drawback in different
economic activity throughout the world. Due to the negative effect of the GFC, various
governments particularly Australia learned many things with regard to ideas such as finance,
banks, greed and investment (Higgins 2010, p.48). Some of the areas that were immensely
affected in Australia include the drop in market rents, the rising vacancy rates and increased
outgoings. Misperception and mismanagement of the risks, higher interest levels and
stringent financial regulation were the major causes of the Global financial crisis. The drivers
of the GFC were all about human psychology on risk perceptions. As much as countries such
as the US, UK suffered, the government of Australia was not largely affected by the impacts
of the GFC. The Reserve Bank of Australia regulated this by increasing the interest rates.
Most of the banks in Australia suffered accordingly when the global share markets
experienced a fall in 2008.This paper seeks to analyze the ramifications of the past Global
Financial Crisis climate currently. The paper further provides the future forecast of the
economy as well as the relative vibrancy of commercial real estate with reference to
economic market and property cycles. Lastly, the paper will discuss how Australia has
managed to deal with the GFC solidly.

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1.1History of the Global Financial Crisis:
The current Global Financial Crisis (GFC) started in 1980s when economic
deregulation took place. It started when the governments decided to eradicate financial
system controls to provide a wide scope for competition to encourage efficiency and
innovation (Raymond and Fischer 2013, p.42). This led to affordable credit which eased
lending standards and the tighter lending margins prompting a rise in the rate of innovation.
The rising pace of innovation made it hard for lenders and regulators to gauge the asset
position as well as banking institution solvency.
Between 2008 and 2009, several mortgage lenders in the U.S failed and the Bank of
America took over to contain the crisis. This problem was not only experienced in America
but also surfaced in several superior European economies that had heavily invested in the US
financial sector. The GFC ended the stable growth and inflation that was being enjoyed by
several countries (Reinhart and Rogoff 2009, p.471). During this GFC period, the nominal
GDP rose dramatically in US, UK and Australia with 120, 150 and 156 per cent respectively.
Most of this growth happened as a result of heavy property investment that pushed prices up
and developing an asset bubble in the property market.
The GFC results have been the sharpest and largest drawback in different economic
activity throughout the world. Dramatic drop has been experienced in the patterns and
volumes of trade. Despite the complex assumptions underpinning the econometric modelling,
the acute extent of the crisis was not properly predicted. The Global Financial Crisis, also
known and referred to as the great depression 2.0 was the key influence in diminishing what
was a stable economic domain within the United States of America (Obstfeld and Rogoff
2009, p.23). However, Australia has also not been spared of these impacts of GFC that
affected property market sectors, investment as well as equity that lead various developments
and companies to succumb to economic stocks.

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Prior to the GFC, key economic indicators provided a sense of confidence and
strength in the American economy including a limited and controlled inflation rate, a steadily
growing GDP percentage, while at the same time being contrasted against low rates of
interest and unemployment. The world’s view on the economy as a whole was positive as it
was producing strong development to all markets including the property sector, resulting in a
stable rise for housing prices (Kindleberger and Aliber 2011, p.39). Due to the sense of
security and confidence felt by general households and property developers, borrowing sky
rocketed with individuals and businesses diving at the opportunity to borrow from lenders in
a growing environment to acquire new homes and development sites.
The surge in the amount applications for loans and mortgages was positively
answered by the banks during the period of economic stability without reasonable knowledge
or investigation into the ability for borrowers to repay these loans. Primarily due to the
unforeseen repercussions of the GFC and the poorly advice and loans provided by bank
workers who were seeking commission on their ability to secure borrowers. Cost of
regulation has since become an issue to the consumer because of government auditing and
investigation on poorly advised loans, and in turn increased the cost of securing a loan for
consumers as these costs were passed on by the banks through consumer fees for loan
application. This limited consumers’ ability to purchase property, resulting in the value of
property assets not growing as rapidly (Karas, Pyle and Schoors 2013, p.187).
With the value of housing and property falling after a significant increase in long term
loans to consumers who were unable to repay their debts, the economy began to suffer as a
result of these major issues. As a result, banks were involuntary required to reclaim
ownership of borrower’s homes in order to cover the cost of unpaid loans by selling
properties below market value in order to cut the total amount of loss.