Market fundamentals are changing and smart commercial property investors are looking to change their strategies.
For the past decade Australian commercial property investors have largely enjoyed capital rate compression for growth.
That’s not to say other performance drivers have been ignored, as investors still need to buy well and add value. However, increasing demand for well-tenanted, well-positioned commercial property has naturally meant higher values than investors would typically see in a weaker market.
The market is now changing, and investing over the next five to seven years will require different acquisition, ownership & divestment strategies to the past decade.
Movement in key economic indicators, such as interest rates, bonds, inflation, and effects of events like US tax cuts, has introduced the need for a shift in focus. Investors may be unable to rely on the natural lift in property values and instead may need a proactive approach to maintaining return and adding value.
As investors and syndicators, our success will rely on staying relevant and remaining aware of industry trends. It’s time to apply new strategies.
It’s Time to Diversify
Different property types are prone to different economic factors and market trends, so diversification is paramount. For Properties & Pathways, this means diversifying some ‘non-core’, large-format retail premises and taking an active interest in office and industrial property.
Industrial properties are typically leased to manufacturers, wholesalers, distributors, or warehouse users, and can be every bit as lucrative as retail. If purchased well, industrial assets tend to have ‘stickier’ tenants where exposure or parking may not necessarily have as much impact on tenant motivation.
Office space with solid, versatile facilities in attractive locations has an ability to attract quality and stable tenants. Properties & Pathways have a considered mandate to locate robust assets in these asset classes to offer a diversified return platform to our investors.
Look for Counter-Cyclical Opportunities
It’s also time for a fresh look at some depressed markets where there is potential for acquiring under-valued properties. Segments of the Western Australian and Queensland commercial property markets are presently showing signs of hitting the bottom (or thereabouts), indicating an opportunity to acquire assets at historically low prices. Naturally, it’s an ideal time to look for property in these locations.
These counter-cyclical opportunities are a sensible addition to any investment portfolio, but only when the asset fundamentals are robust.
Focus on Rental Income
It’s time to shift focus from organic property growth to a property’s rental income potential. Look for properties in markets where the rent is set to increase, because if the value of the rent increases, the value of the property is likely to follow.
We’re actively looking for markets where there is an undersupply of available space, which can create an organic increase in rental rates if demand is buoyant.
Certainly, there are people who will be burnt by bad investments over the next few years. A changing market can catch out an unprepared or inexperienced investor as the risks are certainly there (to the untrained eye). This is the time for knowledgeable investors to capitalise on experience and to unlock value by understanding demand and supply movements.
If you’re ready to invest in Australian commercial property, please get in touch and we’ll hold your hand through it all by investing alongside you.