How “essential services” is the new property market driver

The commercial property investment market will look different after COVID-19. Sure, many parts of the commercial property machine will work as normal, with buyers and sellers pushing and pulling the gears, and typical market fluctuations and economic drivers steering supply and demand. But it is going to be a new world for commercial property. And tenants providing essential services will drive it.

Before COVID-19 hit our shores, it was simple to explain what the ideal, secure tenant looked like for good commercial property investing.

You’d consider international operators, businesses operating nation-wide, and ASX-listed entities as the magic elixirs for successful property investment. These large businesses remain robust occupants for any commercial property landlord.

But we’ve seen some of these big hitters take big hits during the pandemic period. We even hear some not paying rent.

And that’s why the question we’ll all be asking once this global crisis is over is, “What is a secure tenant?”

Essential services: What is a secure tenant in commercial property after COVID-19?

When you think of an ASX-listed tenant, you expect there’s reputability attached to that income. A solid history of performance would produce ironclad assumptions of future business.

But those assumptions might be changing. Instead of the question being, “Is that tenant ASX-listed?” “Is that tenant a global entity?” or “Is that tenant a national body?” the question may be “Is that tenant an essential service?”

Let’s use an example where Jim’s Grocery Store sits next to Flight Centre.

Flight Centre has 689 stores across Australia, 14,000 employees, and almost 40 years of performance history. As a tenant, its covenants would be superb.

Jim’s Grocery Store has two fruit and veg aisles, 300sqm of floor space, and… Jim.

But is Flight Centre an essential service? The answer is no. Their service is an indulgence, used irregularly and barely used in times of uncertainty.

Meanwhile, Jim’s Grocery Store provides essentials for its local precinct and will likely still pay rent during a pandemic.

That difference is likely to change the commercial property market.

The value of essentialism

We’d consider essential services as:

• Government agencies (in particular, Centrelink)
• Banks
• Grocery stores
• Convenience stores
• Butchers
• Pharmacies
• Petrol stations
• Logistics operators

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A lot of tenants aren’t paying rent right now. But a lot of essential services are.

While you mightn’t have given Jim’s Grocery Store a second glance last year, you could be more concerned about how essential the business’s service is these days and how the business would serve as a tenant in uncertain times.

You could start considering the essentialism of a tenant’s service rather than just they are ASX-listed or a national operator. You might instead consider how well that tenant will trade during a pandemic.

Logistics provides another great example of how essential services will impact the property market.

Logistic giants like Toll are probably performing quite well. But so are smaller logistical tenants, that last mile operator who’s an unknown among bigger players. Those operators could be more favourable now, because of the essentialism of that service.

And as always, diversify.

If you look at our portfolio 24 months ago, 80 per cent of it was in Large Format Retail. That’s an enormous statistic, and a scary one.

Since then, we’ve been on an active crusade to strategically diversify into industrial property investment, office property investment, and solar energy, to spread the risk and benefit from the climax of certain industries. Diversification has put us in very good stead in today’s gloomy environment.

Diversification is a tried and tested strategy. And many investors who’ve strayed from this fundamental will begin to flock back to it. Investors will likely pour their money across many markets, many sectors and many tenant profiles.

Principles like these stand the test of time. And the winners in the new world of commercial property investment will use these tools.

It’s essential to adapt

When the market resumes its pre-pandemic strength, we’ll see new playbooks and strategies from property players.

The game might change as a result of COVID-19, and it might be a tough one to play for those unprepared or unwilling to adapt to its new rules. And while we believe investment fundamentals will always be key to solid investing, we see essential services as being one of the best recruits for any commercial property investment strategy post-COVID-19.

For more information on investing with Properties & Pathways in a commercial property syndicate, get in touch with us today. We invest alongside our investors in every investment. Our 88 per cent reinvestment rate proves it.