As the year reaches its midway mark, the commercial property investment market remains remarkably positive according to industry observers. Industrial remains the strongest sector across the board along with essential services such as medical, while the recovery of retail is slower but underway.
“Retail is coming off a slightly lower base,” said Rethink Investing founder and director Scott O’Neill. “For instance, a lot of gyms were closed during the past two years so we’re seeing certainly seeing a recovery there with so many reopening, and as people return to offices that’s generating more foot traffic around retail centres as well.”
The way forward
Mr O’Neill said the election result should augur well for the market given promises to boost business productivity as well as wages. Any rise in immigration would help fill office space which in turn would boost retail.
“There was also no talk around issues that would have jolted the market like scrapping negative gearing,” Mr O’Neill said. “That would have been a shock to residential investor confidence which would have had a flow-on effect to commercial.”
Inflation was a big plus for commercial property investment as rents are generally tied to CPI. Rising building costs were also driving rental growth. “If your rental lease is attached to a CPI incremental increase that is a very good thing because your rents will rapidly grow,” Mr O’Neill said. “This provides the long-term gain investors are after.
“Building costs have gone through the roof and to replace a commercial building may now cost 20% to 30% more than it would have cost 12 months ago.
“What that means is that there will be a strong period of capital and rental growth. Any commercial investor will see much faster rental growth figures than they have in the past as effectively the currency is devaluing against fixed assets.
“For instance, we have a client who owns a commercial property where the rent is tied to CPI plus 1% - so his rent is going up 7% next month.”
Appetite for investment
Industrial property remained “one of the most exciting sectors of the last 24 months” according to national investment firm Properties and Pathways. Logistics and warehousing were most in demand.
Social restrictions combined with the ‘new normal’ created by the pandemic had created significant appetite for four industrial sub-sectors – online retail, logistics, cold storage and delivery services. “The primary and essential services classification across the majority of industrial users has meant this sector experienced little rental loss during the pandemic and this has prompted enormous investor demand,” said Properties & Pathways managing director Cal Doggett. “The pandemic has helped increase tenant requirements for quality logistics and/or warehouse spaces in every one of these sub-sectors.”
Office markets were recovering albeit it slowly and in patches, observers said. This followed the commercial real estate investment sector recording its strongest start to the year in the first quarter of 2022, with $6.5 billion worth of transactions, according to figures from Cushman & Wakefield.
Non-discretionary retail is also showing renewed strength, one of the most positive moves in recent months being the $75 million spent on neighbourhood malls and freestanding supermarkets along the country’s the east coast by private investor and Adelaide fund manager Parkstone. Property analysts report a “deep pool of buyers” seeking exposure to the sector.
Another indicator of the market’s strength is the amount of foreign investment that has been targeting Australia both this year and last. Applications from foreign property investors rose almost 96% in the past year government figures show, the 862 requests representing $82 billion in commercial real estate. This was opposite to the residential market which saw $10.4 billion of applications approved in the same time period, down from $17.1 billion the previous year.
“Despite Australia’s inflationary concerns it remains an economic ‘safe haven’ to invest,” said Ray White Commercial’s Vanessa Rader.
“The large increase in overseas interest this year has been clear and with Australia remaining competitive in terms of yield the spreads remain attractive particularly to offshore pension funds and listed vehicles.
“Hotel investment has also come back after a quiet 2021 and is anticipated to see further increases in 2022 notably from Singaporean investors and the development site market may also see some rebound after a quiet two-year period.”
Hope on the horizon
The next decade should be one of the healthiest for commercial property investment Mr O’Neill said, basically because of the lack of returns provided by the residential option.
“We are continually doing due diligence on new properties and buying on average 40 a month for clients,” he said. “This shows us activity across a very good cross section of the market and gives us a clear picture of commercial investment which is an area where it can be hard to find information.”