Is one city really better than another when it comes to commercial property investment opportunities?
We can always find advice on what Australian cities are home to the best commercial property investments.
For instance, some opinions are currently based on CBRE’s 2018 Asia Pacific Investor Intention Survey, which attempts to identify this year’s most attractive Australian cities for commercial property investment. The report puts Melbourne and Brisbane as two cities on the up, while Sydney is experiencing a slump in investor confidence.
But is one city ever really any better than another when it comes to commercial property investment?
While various Australian cities can sit in different parts of the economic cycle at any point in time, opportunities are created in the busts and capitalised on in the booms.
It’s understandable that some investors will feel more confident about one city over another at any given time. Chances are they’ll have confidence in particular sectors or markets, where they have identified solid investment opportunities. But this doesn’t mean you ignore a struggling Brisbane market to focus on a buoyant Melbourne one. This would be a flawed strategy.
Here’s what smart commercial property investors may do instead.
Identify an undervalued property
(in any market)
Undervalued property has high potential to make an excellent investment, no matter what part of the economic cycle a particular market is in.
Regardless of where the market is in the cycle, the potential for good capital growth in commercial property investment is typically found in these two scenarios:
- Identify an undercapitalised asset that is probably being used for the right purpose but is not being used correctly. This enables you to add value to the property with appropriate improvements (i.e. adding an extra storey, extending floor space, improving signage);
- Find a property that isn’t being used for the right purpose – or isn’t being marketed correctly – and capitalise on the opportunity. These properties aren’t necessarily undervalued, but are underutilised.
Leverage on a property’s lost relevance
The common thread between these two above opportunities is the assets have lost their relevance. That’s where the potential profit lies. It’s something we see over and over again.
Opportunities in the second scenario typically occur through the gentrification of a property.
In 2016, we bought a large format retail asset in Tuggerah, New South Wales. The property was supposedly overpriced because it was directly across the road from a Super Centre (and so had lost some of its relevance). Yet we managed a 40% return for our investors in just 18 months.
Some people told us Tuggerah was the wrong location to invest in, but it was actually the perfect positional play. We identified a small window of opportunity to activate redundant lettable area in a neglected asset. We added value and made the location more attractive to potential tenants.
(You can find out more on the Tuggerah story here)
Always return to property fundamentals
Regardless of the economic activity in any particular market, property fundamentals tend to remain. It doesn’t matter whether a CBRE survey has found investors are feeling more or less confident in putting their money in one market over another, as these surveys are usually based on historic results – not future opportunities.
A good investor will identify an excellent opportunity in any economic climate. It’s all about what makes a property relevant.
Being able to recognise robust commercial property investment opportunities takes expertise and entrepreneurial vision. That’s why we recommend investing with a professional commercial property investment syndicate.
If you would like to know more about investing alongisde Properties & Pathways, please get in touch.