Commercial property doesn't come with the fast-moving capital growth opportunities of residential property. But, equally, it’s not exposed to sharp falls in value – a by-product of longer lease periods.
Bank returns are dwindling after a string of – and likely future - RBA cash rate cuts. At the same time, share markets are reeling from geo-political concerns and trade disputes. The combination of the two influences have left investors hunting yields, in alternative asset classes.
Consequently, yields in commercial property will become the beacon for investors, especially as the nation plans out its infrastructure pipeline.
The infrastructure program has the potential to deliver greater operational efficiencies, urban regeneration and employment opportunities across Australia: the Badgerys Creek Airport, Metro and WestConnex in Sydney; Cross River Rail and the second airport runway in Brisbane; the Fremantle Bridge and Tonkin Highway in Perth; and the North-South Corridor project in Adelaide.
Outside the metropolitan areas, Inland Rail - which will eventually link Melbourne’s and Brisbane’s ports - will underpin the economies of regional centres including Albury, Wagga Wagga and Toowoomba. Agribusinesses will be greeted with a raft of supply chain opportunities to transfer their products, internationally.
The national infrastructure pipeline will create efficiencies for tenants, especially operators in warehouses and industrial parks around the nation.
So, with the official cash rate dipping 75 basis points in a year and investors, in general, hunting yield, commercial real estate buyers will have to be competitive to secure properties with long WALEs or quality, whole-property tenants.
There’ll no doubt be yield compression as a result of heightened competition.
The reliability of bank term deposits is now overlooked by the fact returns are tanking below 2% for investors.
While the trade tit-for-tat between the US and China netted a small deal in October, providing a bounce for global markets, the volatility of shares in recent years has scared many seasoned market pundits.
As well as global factors, many listed companies are grappling with influences that are closer to home, including Corporate Social Responsibility (CSR). There’s a rising volume of shareholders who want peace of mind that the outputs of their portfolio, not simply the dividend contained in the Annual Report.
These environmental and social justice issues have gained momentum in the marketplace and boardrooms, materialising as line items in the operational expenses of public companies.
Commercial property has a proven reputation as a reliable asset class, especially when bolstered by an infrastructure pipeline that delivers efficiencies to tenants.
Admittedly, retail faces a challenge keeping step with the changing behaviours of online customers. Major department stores including David Jones, Big W and Myer have indicated they will rationalise their floor spaces. Experiential operators and unique food retailers are still finding the right balance for profitability but run-of-the-mill shopfronts are turning over quickly and exposing landlords.
But industrial is a winner in the rise of e-commerce, with warehouses supporting the transport and logistics sector, particularly amongst last mile operators.
In Sydney, the Central and Outer West industrial markets are averaging yields around 5.5%. In Brisbane’s TradeCoast, investors can find average returns of 5.9%, while Adelaide’s Inner West and North hover around 7%, similar to Perth.
Office yields are tighter as a result of limited supply and withdrawal of stock (in Sydney, the Metro has reclaimed significant volumes of office space, resulting in yields of only 4.1% in the CBD). In the suburban markets of Chatswood and St Leonards, yields are in the order of 5.8%.
In Brisbane’s fringe, investors are receiving an attractive 6.3% but are challenged by a high vacancy rate. It’s a similar story in West Perth, but investors are getting good bang for their buck with average returns of 7.5%.
Residential investors may chase yields on offer in commercial and the comparative security of longer tenancies. According to CoreLogic, the average capital city combined house and apartment yield was 3.3% in Sydney.
Commercial property doesn't come with the fast-moving capital growth opportunities of residential property. But, equally, it’s not exposed to sharp falls in value – a by-product of longer lease periods.
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