In uncertain times the sound of any asset that comes with the tag “recession-proof” is extra sweet. Fortunately, commercial property is a fertile landscape for such investments and in the current economic climate certain sectors are proving richer pickings than others.
Right now, analysts and advisors are recommending investors train their property searches on assets that can provide a hedge against inflation: healthcare and medical assets, premises tenanted by essential retail such as supermarkets and any others selling non-discretionary goods, and selected specialist properties such as veterinary clinics and childcare centres - especially those in areas where official data (not only anecdotal evidence) shows a rising population of young families. As for healthcare and medical, these asset’s investment-worthy nature has been under-pinned by substantial government investment as well as the country’s ageing population.
Pick of the crop
Industrial assets, while solid investments at any time, are currently the most coveted by seasoned investors according to Scott O’Neill, director of investment advisory Rethink Property Investing.
“The market for industrial property is so strong even a recession wouldn't take much of a dent out of it,” Mr O’Neill said.
“For a start, vacancy rates are below one per cent Australia-wide.”
Commercial properties delivered investors a hedge against inflation in two ways, either naturally through rent reviews linked to the Consumer Price Index (CPI) or via strategies that added value said Damian Collins, chairman of Perth-based Westbridge Funds management. Industrial property was a perfect example thanks to the former, with prime industrial rents nationally having jumped over 20 per cent in the 12 months to December last year.
“It’s no secret that industrial property has benefited from the boom in e-commerce,” Mr Collins said. “The rise in online spending, accelerated by the pandemic, means some companies are now requiring more space as a means of storing back-up inventory to avoid supply chain issues.
“Now these conditions also present a unique opportunity from a repositioning perspective. In targeting underperforming industrial assets with value-add potential, investors and fund managers have the opportunity to meet this combination of undersupply and high demand to capture increased rents, in turn helping to protect against the impact of rising interest rates on asset values.”
Looking ahead
Before purchasing any commercial investment, Mr O’Neill said investors should thoroughly investigate the tenant’s performance, past and projected, and have iron-clad confidence in their ability to pay the rent.
“If you know they are one of the types of tenants that fit into the category above, then you should feel comfortable a slowdown in the economy won't be fatal to their business,” Mr O’Neill said.
Another investment tip particularly relevant to current markets is to strike as soon as possible when interest rates do eventually fall.
“This scenario presents a big opportunity for commercial investors to get some of the best cash-flow returns in recent times. Mr O’Neill said.
The big divide
The question of whether office assets should be on investor’s lists has divided opinion between advisors and analysts for some months. Mr O’Neill said CBD office space was the stand-out as the one asset class to avoid at the moment. “This area is still weakened by the aftermath of COVID-19,” he said. “Also, if unemployment rises this year the office market will not fare well.”
And until the economic tide turns, Mr O’Neill further advises steering clear of assets tenanted by businesses reliant on discretionary spending such as restaurants
But while Mr Collins advises investors be selective, he said there was still potential in some office markets to find solid yields and assets to purchase below replacement values. Research had shown office space remained a priority for many businesses wanting to maintain face-to-face collaboration, he added, while quality, eco-friendly assets were another growing opportunity, Colliers data showing about 70 per cent of leasing deals in CBD markets in Q3 2022 involved tenants committing to prime office space in this class.
“This isn’t to say investors shouldn’t be cautious in where and what they invest in,” Mr Collins said. “We are still seeing divergent occupancy rates for office assets across Australia’s capital cities. Data from the Property Council of Australia shows occupancy rates have reached 80 per cent in Perth and remain as low as 56 per cent in cities like Melbourne which are struggling to draw workers back into the CBD.”