A lack of supply means increased tenant demand and yields for commercial property investors

Gerry Harvey appeared to sum it up fairly well in a recent interview:

"It was unusual to have such a poor sentiment at a time when Australia's economy was relatively strong compared to America and some countries in Europe."

Harvey feels Australia has an economy regarded as strong by outsiders. And yet there is a total lack of confidence, and businesses are therefore suffering.

Overseas investors are actively targeting Australian commercial property — accounting for around half of all sales of over $30 million. However, local investors remain hesitant.

This is purely a confidence thing — something my articles have been attempting to explain, over the past few months.

Experts are purely blaming the overseas turmoil. And it's true, countries affected by the financial crisis have not yet adjusted their economies to the long-term structural shift taking place — mistaking it as simply a fall-off in demand.

Fortunately, Australia is able to sell its mining output to China — creating funds now, to allow for structural adjustment over time.

And so, as tough as this may sound, propping up selected industries through subsidies is simply bad economics.

Instead, the government should be fostering a flexible environment within which businesses and workers can be encouraged to adapt.

Surely China is in trouble?

During the second quarter of this year China's growth was probably slower than at any time in the past three years.

It has been well reported that China's growth rate has cooled. But that doesn't mean a hard landing — because the current expected growth rate (of 8% per annum) is scarcely stagnation.

With inflation seemingly now under control, China has already begun cranking up approvals for roads, airports, steel mills and social housing.

All of these will require what Australia's mining sector produces.

Therefore, Australia's problem will not be a fall-off in global demand. Rather, it will be the impact of greater competition from other countries supplying commodities.

But this is an unlikely to occur until 2016, when the world economy should have fully returned to an expansionary phase.

How should commercial property investors respond?

Because of the general uncertainty, quality commercial properties are starting to look cheap. As an investor, the secret is to have your lease expiry (and therefore a rental review) occur in 2016-17.

That will then provide you with solid income during the current period of confusion. And also allow you the opportunity to reap considerable capital growth, when you review the rental to market.

Bottom line: Confusion generally means inaction.

For commercial property, that translates into there being no meaningful new development in the short term — certainly not of a speculative nature.

However, against this lack of supply, you will still have a growing tenant demand, which will result in increased rentals, and lower capitalisation rates.

In other words, the precise scenario most investors would hope for.

Therefore, recognise it for what it is and position yourself now, before everyone else finally twigs to what was actually going on.