Investors see bright side as property holds its status AUSTRALIAN property investors have grounds for optimism over the next 12 months, but experts say big returns are unlikely in both the residential and commercial sectors. Some 39 per cent of the high net-worth-investors feel optimistic about the Australian property market, according to Hall & Partners Open Mind survey results, and another 5 per cent feel supremely confident; of the rest, 30 per cent feel pretty neutral, 22 per cent are quite concerned and 5 per cent are scared as hell. The optimism is reflected in likely asset allocation choices in the next year, with high-net-worth individuals indicating they would allocate $23 of $100 to property, the second-highest allocation to an asset class after shares. The optimism comes despite 33 per cent believing interest rates will rise in the next 12 months. Property remains the third most popular asset class behind ordinary savings accounts and shares, with 54 per cent of respondents saying they have an investment property. Analysts say the residential and commercial property markets do have some attractions in the short- to medium-term, particularly relative to the low yields offered by fixed interest and likely continuing equity market volatility, but investors can't expect huge gains. Angie Zigomanis, senior manager of residential at BIS Shrapnel, says for residential property investors, cities such as Sydney, Perth and Darwin are likely to offer the highest growth, but returns are not likely to exceed 5 per cent. Zigomanis says interest rate cuts are driving the residential market; but rather than driving a strong upturn, the cuts are simply preventing weaker conditions with most sectors of the economy weak. The Perth market has been boosted by overseas migration in the past 18 months, which has seen vacancy rates tighten and rental growth accelerate. "That's starting to be reflected in price growth," Zigomanis says, adding that Sydney faces a similar outlook. Brisbane faces similar demand pressures but confidence has lagged. Melbourne, Canberra and Adelaide are struggling with slow demand and an oversupply of new houses built in the wake of the government's GFC stimulus. "That's now working its way through the pipeline," Zigomanis says, adding that high vacancy rates are emerging due to the excess supply. But interest rate cuts should prevent price drops. Commercial property faces similar dynamic to the residential market in the next 12 months, with the Perth and Sydney markets, particularly CBD offices, leading capital city gains. Dr David Rees, head of research and consulting at Jones Lang LaSalle, says demand for commercial property is strong with growing offshore and domestic interest, and investors are choosing to look through subdued leasing activity and take a longer-term view. Commercial property is also being driven by the hunt for yields, with yields of between 6 and 9 per cent for shopping centres, office and industrial sites attractive relative to bonds and other assets. Still, Rees says that for the next 12 months capital gains are "not going to be enormous," and are likely to be around the long-term growth rates of between 2 to 3 per cent. But along with yields that still makes commercial property attractive. Rees says that in the next year the Sydney and Perth office markets look particularly strong but Melbourne will struggle with short-term oversupply. Brisbane's CBD has also been hit by rationalisation of the public sector.