Commercial real estate investment will look quite different after this year’s unprecedented events. The search for secure tenants has seen a marked shift in perceptions of what constitutes a safe investment, and the effects seem set to last for a while yet.
Sharing the top of investor wish lists are industrial floor space and businesses deemed essential services that have survived and even thrived during the pandemic. These include healthcare, service stations, government bodies and grocery stores to childcare centres, convenience outlets, banks, butchers, pharmacies and logistics operators. Now that many of the traditional investment targets of ASX-listed businesses, nationwide companies and international corporations suffer due to economic downturn, investor attention is squarely focusing on bomb-proof assets and secure tenants who can pay the rent.
Among the most popular investments this year have been service stations. Leading national property agency Burgess Rawson has sold 16 so far under the hammer, about $105 million worth, and several more go to market at the agency’s final Melbourne Portfolio Auction for 2020 on December 9.
“We sold more service stations at the height of the pandemic than at any time previously,” said Burgess Rawson’s director of sales Michael Gilbert. Neighbourhood supermarkets have been similarly popular. “That’s if you can get them,” Mr Gilbert said. “But you just can’t.”
September quarter figures from Jones Lang LaSalle (JLL) show demand for industrial floor-space is now so strong it is on track to exceed the 10-year average. There is more leasing activity than at any time since early 2015 and national take-up of industrial real estate has hit 2 million square metres – all driven by the spiralling passion for online shopping which requires more automated warehousing to expedite the delivery of goods.
Charter Hall Group is among investment houses concentrating heavily on the sector. Recent acquisitions include an $87 million prime industrial investment in Melbourne, a $207 million purchase in Sydney’s Minto acquired in a 50/50 JV with its $6 billion Charter Hall Prime Industrial Fund, and several long-leased assets to chicken company Ingham’s. “Most institutional investors are significantly underweight within the industrial and logistics sector and wish to increase their exposure to the strongly performing sector,” said Charter Hall Group’s managing director and CEO David Harrison at a recent strategy announcement.
Industrial property’s star was already on the rise before the pandemic gave it an almighty shove. The asset class accounted for just under 10 per cent of institutional transactions in 2009 but by 2018 had jumped to almost 50 per cent, driven by traditional retirement investment strategies gradually swinging from residential property and shares to the higher yields of industrial commercial real estate.
The healthcare care sector has experienced a similar trajectory. According to CBRE, $549 million worth of healthcare, medical centres and hospitals transacted nationally in 2019, more than 100% from 2018. This year healthcare has continued to strengthen, 2020’s spate of transactions including the recent $5 million purchase by a Hong Kong investor of a 1630sqm centre in the Melbourne medical precinct of Wantirna.
“We are seeing more investors gravitate towards healthcare as an asset class due to its relative security given our ageing population and the increasing demand for medical service nationally,” said Jimmy Tat, CBRE’s head of Asian capital and a member of the firm’s Australian Healthcare and Social Infrastructure team.
“The reopening of the Victorian economy, coupled with the general stabilising of the wider Australian economy, is helping to reignite confidence in commercial real estate, with many investors looking for premium location assets and strong lease covenants.”
CBRE’s Director of Healthcare and Social Infrastructure Australia Sandro Peluso labelled healthcare an emerging prized sector of commercial property.
“Even in the middle of a pandemic it is proving to be a stable income-producing asset class,” Mr Peluso said. “Healthcare property investors are less likely to feel the pressure of rental relief or long-term vacancies than traditional asset classes, which is a priority consideration for many investors. A lot of investors are pulling money out of super and establishing SMSFs to invest in commercial property, providing a greater and more reliable return than those funds that are exposed heavily to equity markets.”
Within the office sector, investors are zoning in on urban hubs as opposed to the traditional CBD. The volume of office space snapped up outside city centres has jumped significantly this year, JLL data showing that since the start of 2020, 48 real estate assets were sold in the country’s non-CBD markets, double the number within CBDs.
“We haven’t seen anything like this in five years,” said JLL Australia’s head of capital markets Luke Billiau. “Investors are anticipating greater tenant demand for affordable spaces close to where employees live.”
A major example was September’s purchase of Pinnacle Office Park – three office towers at Macquarie Park in Sydney’s north-west - by Singapore’s Keppel REIT. With Macquarie Park being a major urban hub serviced by trains, buses and at the junction of major highways, Keppel’s chief executive Paul Tham said the $306 million purchase met their expectation that demand for “quality and well-networked metropolitan locations” would increase as companies catered to employee’s rising desire to work closer to home and sought cost-effective solutions.