Regional markets have always been on the radar for savvy investors. Now the appeal of commercial real estate in non-metro areas is being further enhanced by urbanites fleeing the city for regional centres that offer simpler lifestyles and more affordable housing.
While the concept of making a sea-change was steadily gaining popularity pre-2020, a combination of pandemic-driven factors, the work from home shift, and subsequent spike in metropolitan home prices has caused it to soar. Dozens of regional areas are being transformed as a result, said head of buyer’s agency Maker Advisory Reece Coleman. “Commercial growth is following this new mass migration because new residents are looking for services,” Mr Coleman said.
“This is leading to a transformation of retail and commercial needs in dozens of regional cities and suburbs. We’re seeing areas like Terrigal [on the Central Coast] where it’s now impossible to get retail space.”
Regional areas have long presented some of the greatest opportunities for commercial property investors and developers due to lower entry prices and generally higher yields than in metropolitan areas. A common belief is that these factors come at the expense of capital growth. But this is not always so, as seen by the sale of a commercial site in the NSW south coast town of Bateman’s Bay earlier this week by leading boutique commercial property firm Burgess Rawson. The site occupied by the Commonwealth Bank sold under the hammer for $2.34 million presenting a yield of just above 5 per cent after previously trading for $1.35 million in 2014.
“There is often the perception that buying in a regional area is a trade-off between one or the other [capital growth or high yield],” said Burgess Rawson sales director Michael Gilbert. “This kind of sale demonstrates that you can get both as it shows really strong yield all the way through plus capital growth.”
Regions with solid fundamentals, a solid population base and strong visitor numbers are always the most highly sought after by investors. Current conditions have seen the economies of many such places strengthen particularly those towns within a 3 to 4 hour drive of major centres such as Sydney and Canberra said Burgess Rawson director Simon Staddon.
“In Sydney yields are generally 4 to 5 per cent if not lower while in regional areas 5 to 7 per cent is the norm depending on the asset class,” Mr Staddon said. “Those regional areas with solid populations all need businesses like a Repco, a Dan Murphy’s, a Chemists Warehouse. Bank branches for that matter will be a lot safer in regional areas than a metropolitan suburb where they are more likely to face closure – and the fact that you’re miles to the next town makes your tenants more likely to stay, or ‘more sticky’.”
Among the regional cities outperforming capital cities last year were Newcastle-Maitland, Goulburn and Bowral-Mittagong in NSW, Geelong, Ballarat and Warragul-Drouin in Victoria’s West Gippsland, and Gympie in Queensland. The regions, singled out in a 2020 report by economics consultancy Polis Partners, showed big gains across population bases, business and jobs growth and investment in residential and commercial construction.
Further benefiting regional areas is a raft of national and state government funding. The NSW government for instance is pouring more than $2 billion into regions over the next 30 years via a range of programs administered under the umbrella of the Regional Growth Fund.
NSW’s thriving agricultural, strong manufacturing, tourism and service industries already support over one third of the state’s population said Xavier Rahme, Manager of Regional NSW Metropolitan Investments for CBRE.
“The affordability crisis within metropolitan markets has been a driving factor behind recent regional NSW growth,” Mr Rahme said. “As Sydney’s housing supply becomes proportionate with its population growth, residents and investors are seeking alternate locations to live and invest.
“Major regional towns including Newcastle, the Central Coast, Wollongong and Orange have experienced exponential growth primarily driven by government infrastructure commitments, pre-COVID increases in overseas migration and low interstate outflow.”
CBRE was currently marketing for sale residential land in Orange and the Hunter Valley with record levels of enquiry, Mr Rahme said. “These markets are undersupplied with housing with demand from developers strongly increasing. Affordable housing makes this an attractive alternative to buying in Sydney with very similar profits to be made by investors and developers.
“COVID 19 and technology advances have also been a driving factor behind the push to the bush. As residents are now more flexible with working from home, many are cashing out of the Sydney market to purchase in more affordable areas.”
Likewise in Victoria, lack of quality opportunities in Melbourne was the chief driver of interest in regional areas said Scott Orchard, CBRE Senior Director, Melbourne middle markets.
“This is pushing institutional buyers and syndicates to consider broader geographic opportunities at lower price points than they would normally consider,” Mr Orchard said.
“In turn, private investors are pushing out into regional areas that are less competitive and generally offer higher returns. However, this does often carry higher future leasing risk.”
CBRE will soon be marketing two car park assets - one in Shepparton and one in Bendigo on behalf of Care Park. “These are expected to attract considerable interest given the Care Park lease covenant,” he said.