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5 big trends in commercial property investment

Categories: Commercial, Investments

Here are five important trends in commercial property investment in Australia in 2017.

Like any other investment, commercial property is subject to market trends. So, what’s the state of the market now? And what are the trends we’re seeing in commercial property investment in the latter part of 2017 and going into 2018?

Investors are chasing yield

There are property professionals who are committed to the industry but there is also a host of other investment-minded analysts, off-shore parties, funds and local organisations who compare property yield to other investment avenues. These may include bonds, shares and equities, for example, and these investors have no loyalty to any one class of investment.

Bonds in particular are regarded as secure, reliable, long-term investments and there is significant evidence to suggest a large part of the increase in commercial property investment over the last five years has been on the back of significant disparity between these two avenues. If you look at the five- to 10 year bond rate, for example, that has been lower than the available property yield over the same period. Naturally, the security of a 15-year lease to Woolworths or Bunnings has become more comparable to the security provided by government bonds. Investors seem to have become more comfortable with the security of these ASX-listed covenants and, as a result, property is becoming a much more attractive mechanism for investors looking to secure long-tenure investments.

Investors still looking for those two fundamentals (security and yield) are now having to look further and wider as the yield curve on commercial and retail property has continued to tighten. These investors will go where the yields are. If bonds or shares start providing better return and security, they’ll start shifting their available equity into those markets.

Speculators entering the market

Other investors are moving into commercial property because they’ve heard speculation about the market. For example, if the media starts reporting the Sydney office market is really good, they start chasing Sydney office stock for their investment portfolio. This is risky territory and these sorts of investors can easily come undone not too far down the track without robust economic evidence to support their decision.

For instance, while you might hear the property market is booming right now, you would be foolish to assume the same conditions apply to Western Australia and Sydney. For example, if you were buying in WA or parts of Queensland right now, you’d be buying nearer the bottom of the cycle, but on the Eastern seaboard it’s a completely different story: some might say the trend in the Sydney central business district is for overpaying for stock right now.

The interesting part of all this is while investors chase yield and move into the property market, they often don’t leverage property expertise in doing so. Buying a bond is a lot more “vanilla” than buying a property, with its thousands of variables to worry about. And yet we are witnessing a lot of investors buying “blind”, without inspecting the property. That is to say, they are buying purely because of the covenant and the tenure of the tenant. This can be dangerous, indeed. As with any industry, its often “the things you don’t know that you don’t know” that catch investors out.

Tree changes and sea changes

In the past, investors have been biased towards metropolitan locations — only buying in the CBD or within 30km of a CBD. However, over the last 12 to 18 months this prejudice has slowly evaporated in some pockets and the market is getting more comfortable with buying in regional locations. This seems largely to be driven by yield.

Regional yields can be 100 to 200 basis points higher for a comparable asset in a regional location compared to metropolitan locations. Some of the solidly performing regional locations that come to mind are Toowoomba, Newcastle, Cairns and Bathurst. They’re all cities with robust population densities of 40,000 or more people. These communities can generally sustain the sorts of businesses that require long-term property leases, and clever investors have been securing these assets at higher yields with very reasonable security.

Harnessing solar power

There’s a big movement towards solar power. Australia has the most expensive electricity in the world, so both tenants and landlords have started investigating alternatives — and many have landed on solar power, including rooftop panels and battery storage. While some proactive landlords are using battery storage, most are selling the excess electricity back to the grid. The clever landlords are making a small margin by generating electricity at a cheaper rate than buying from the grid and selling the electricity they’ve generated to their tenants at cheaper rates than the wholesale price which the tenants would otherwise pay. This effectively creates a better purchasing environment for the tenant and a small margin for the landlords, which is a win-win for both parties — and the environment.

If you’d like to chat about the latest trends in commercial property investment, or if you’d like to invest with our commercial property syndicate, please get in touch with Properties and Pathways on +61 8 9285 0396.