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Why Melbourne is the epicentre of great commercial property opportunities

Categories: COVID-19, Industrial, Investments

COVID-19 has disrupted Melbourne’s economy, flipped retail on its head, and forced logistics operators into overtime. So, do brilliant opportunities still exist in Victoria for willing commercial property investors?  

Melbourne has been rattled for a second time by the coronavirus pandemic. And while new cases are dropping in Victoria’s capital, there’s still concern among both residential and commercial real estate investors that the uncertainty of tomorrow is too great to invest today. 

A lot of tenants aren’t paying rent, business activity is declining, and the idea of a quick recovery seems optimistic. But is this the truth? 

Back in February 2020, all eyes were on the industrial and logistics sector, in particular in Melbourne. And while many investors are fearful, we’ll show you why any pre-coronavirus optimism for Melbourne investment is still valid today – perhaps even more so than before. 

1. Scarcity of commercial assets and land

In the last five years, supply has plummeted in quality Melbourne locations with close proximity to large centres of population. This has put strong upwards pressure on land values across the state (although Melbourne’s West precinct is expected to see a large wave of construction completed by mid-2021). 

According to JLL, larger 2-5 Ha lots have appreciated by an incredible 92 per cent in the five years to Q2 2020, increasing an average of $229 per sqm. Imagine this sort of capital growth in the next five years, but having first purchased the asset with a “COVID-19 discount”. 

The AFR adds, “Goods, from a backlog of orders before the coronavirus escalated in Australia, are being carried in thousands of shipping containers from China, where ports and factories are re-opening.” 

These goods need to be stored somewhere before logistics companies transport them to online shoppers. The lack of supply could lead to huge demand for storage and warehousing, well into the future. 

As Victoria is the hub for national distribution activity, demand for warehousing and industrial space in Melbourne is likely to explode as a result of  scarce supply.

2. Occupier activity

Investors’ appetites have unfortunately been spoiled by bad information and overly tentative investors. 

But if we look beyond the newspapers we’ll see many industrial tenants are performing as good as – if not better than – their pre-coronavirus levels. 

Regardless of the impact government mandated lockdowns have had on Melbourne’s economy, take-up of industrial space has remained strong throughout 2020. So strong, in fact, it’s on track to outperform the 10-year annual average. 

In the last decade, the average annual gross take-up of total Melbourne floorspace has been 700,000 sqm. Led by Melbourne’s West precinct, total floorspace take-up is on its way to 600,000 sqm so far in 2020, with a quarter of the year still remaining. 

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Out of the businesses hungry to occupy high-quality industrial space, key logistics tenants are the hungriest. And it’s no surprise why. 

3. Victoria had the biggest month in Australian eCommerce history

Industrial and logistics tenants are the bright stars in Melbourne’s dark sky. And it’s all thanks to the pandemic itself. 

According to Australia Post, Victoria drove the biggest month in Australia’s eCommerce history in August 2020. Online spending was up 8.9 per cent higher than 2019’s Christmas period and 5.8 per cent higher than its previous peak in April 2020. 

Online purchases in Melbourne were 170 per cent higher in August 2020 than they were in the same period last year. That means more than a third of Australia’s online purchases were made in Victoria during August (as well as July). Think COVID-19’s lockdown and restrictions have caused a meltdown in Melbourne? Think again. 

NAB also reported a national year-on-year increase in eCommerce adoption of 62.6 per cent in the 12 months to July 2020, with Victoria recording the highest rate of eCommerce consumption out of any state in Australia. 

This has forced logistics and warehouse operators to ramp up efforts to cater to this gravity-defying increase in online shopping, to the point where the Australian Federal Government has labelled these industrial occupants essential services

These days, there’s no greater comfort for a commercial property investor than one who’s tenant is an essential service. 

4. Fantastic window for buying opportunities

Robust investment opportunities have been hard to come by in Melbourne, due to the scarcity of high-quality assets. But with many players sitting on the sidelines, fearful of pandemic-fuelled uncertainty, the field is spacious for smart investors to snap up a winning investment. 

For example, international investors – who typically account for around 33 per cent of annual Australian commercial real estate transactions – are currently restricted from entering Australia. This creates a window of opportunity for Australian investors or those with trustworthy contacts on the ground in Victoria. 

As they say, being willing makes you able. For property investors, the willingness to look where others aren’t will enable them to seize genuine investment opportunities… and potentially discounted opportunities. 

5. Population growth

Melbourne is Australia’s fastest growing capital city, growing at 2.3 per cent in 2019 (Sydney fell well behind at 1.7 per cent). 

And despite COVID-19, Melbourne’s population is still on track to hit the 6 million mark by 2025 (higher than Sydney’s estimated 5.84 million), pushing Sydney from the podium as the most populated Australian capital city. Melbourne’s West region alone is tipped to more than double between 2015 and 2046. 

Population is one of the biggest drivers of commercial property values. And the next few decades for Melbourne, the perennial chart-topper of the Economist Intelligence Unit’s most liveable city in the world (winning the award for a consecutive six years), will see volumes of interstate and international migrants that no other Australian state has ever experienced. 

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6. Infrastructure

Melbourne’s population boom has led to record-breaking investment in major infrastructure projects by the Victorian government. 

The $10.9-billion Inland Rail project, the $13-billion Melbourne Airport Link, and the whopping $50-billion Suburban Rail Loop are just some of the infrastructure projects in the pipeline. 

Meanwhile, Plan Melbourne, a 35-year blueprint to massively enhance the city’s infrastructure, increase sustainability, and cater to an expanding population, could drive up to $70 billion in additional economic output in Victoria and create more than 400,000 new jobs by just 2025. 

Substantial infrastructure investment is also expected to be the catalyst for Melbourne’s COVID-19 recovery. It’ll also attract capital injection from investors who know that a tested investment strategy is to follow infrastructure spend.  

Property fundamentals remain 

Although Melbourne is struggling with some economic uncertainty, property acquisition is still a mechanism of applying the fundamentals and analysing the detail, which drives the dollars. 

Right now we would suggest investors should look for an asset occupied by a relevant tenant in a core location. 

A relevant tenant these days is likely one labelled as an essential service. We’ve already touched on the demand for third-party logistics operators while eCommerce is swelling, so a good start could be looking at industrial assets occupied by logistics businesses. 

On top of the uptick in activity for industrial tenants, Melbourne is the preferred spot for new institutional-grade industrial property, particularly in the West. This is thanks to the excellent network of arterial roads and major transport linkages. Investors looking for a gem could probably find one in Laverton North, “the best industrial precinct in Victoria”, some experts say. 

Keep in mind, an investment that can weather the coronavirus storm is likely able to stand the test of time thereafter. 

Eyes on the ground is imperative 

With Melbourne locals unable to leave a 5km radius during the fourth (and third) lockdown stages, and interstate investors unable to attend on-site inspections, access to key property professionals in Melbourne will be crucial in order to find an investment gem. 

Trust and transparency will be two key ingredients here. Deep relationships with leasing and selling agents in Victoria is important. But independent and unbiased consultation is absolutely critical. 

Of course, a major benefit to Australians looking to invest in Melbourne is that we have the second most transparent real estate market in the world. 

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Melbourne investment success will depend on swiftness and precision

Maybe the biggest regret for commercial property investors will be sitting on the bench while brilliant investment opportunities pass them by. 

Precision will lead investors toward the right investment. While swiftness will ensure they’re the first to snap up an incredible commercial property investment opportunity. 

Don’t want to miss out on a robust commercial property investment? Sick of having funds tied up in underperforming investments? Get in touch with Properties & Pathways today. Our next exclusive investment is just around the corner and is guaranteed to sell out fast.