Demand for residential property in Sydney, Melbourne and Brisbane is expected to pick up slowly next year while retail property languishes at the bottom of the cycle, a survey shows.

An Australian Property Institute (API) survey of more than 30 industry players also predicts the current upswing in the commercial and industrial property sectors will continue into 2013 and beyond.

By 2014, all of the sectors will have moved out of the current downturn amid slow growth, it says.

API NSW Vice President Tyrone Hodge said the retail sector was experiencing ongoing uncertainty as part of a continued downturn while residential property slowly improved.

“Retail building owners will really need to start to think about how they fund those retail businesses and the smart operators will be those that can change their tenancy mix,” Mr Hodge said.

It’s expected that as people save more and do more shopping on the internet existing shopping centres will have to adjust.

The report said residential property markets in Sydney, Melbourne and Brisbane had stalled near the bottom of the property cycle with only small advances predicted over the next two years.

Mr Tyrone said the Sydney residential property market had shown little movement over the past seven years and it was not expected to make significant progress over the next two.

“The key thing is sentiment from the developers but also supply and the planning regime,” he said.

“There’s just no stock available in Sydney, and it’s the same in Brisbane.”

Lack of affordability for both new and established homes would continue to keep the market flat, he said.

Demand for commercial property would continue to improve in Melbourne, Brisbane and Sydney while retail property was the least advanced along the upswing of the four property classes.

Mr Hodge said prime office space in new buildings would outperform older buildings, with a large supply in Melbourne and virtually nothing in Sydney.

“You’ll see an improvement in rents but you’ll see a very clear separation between prime and the others.”

Industrial property continued to provide higher returns than commercial and retail.

Most respondents said lease incentives were a feature of all Australian capital city markets, with the trend declining in Sydney, Perth, Melbourne and Brisbane. Incentives in Adelaide and Hobart had increased.

The survey found market values and market rentals for commercial property in Brisbane would increase in the next 12 months while smaller increases were expected in Sydney and Melbourne.

Offshore investment was driving the performance of commercial property but it did expose Australia to overseas risks.

“If everybody takes out their money and says they don’t want to invest in Australia anymore, that would have an effect on value,” Mr Hodge said.