Commercial property – the perfect storm for premium prices

In a buoyant market, some locations are poised for FY 2018 capital growth of up to 15%.

Raine & Horne Commercial has just launched its Spring 2018 edition of Commercial Insights, providing an in-depth look at commercial property markets right across Australia. And what it shows is an asset class with exceptional upside.

According to Commercial Insights, several key drivers are underpinning strong demand and robust returns on commercial property:

  • The absence of a significant pipeline of new supply
  • The withdrawal of former commercial assets for residential property development.
  • Low commercial lending rates making it cheaper to own rather than lease business premises.
  • Self-managed superannuation funds (SMSFs), and increasingly retail investors chasing high yields and low maintenance costs.

Tight supply, rising demand

The boom in the residential property sector has seen limited land releases earmarked for commercial development. At the same time, many former commercial assets are being redeveloped for multi-use or residential stock. Angus Raine, Executive Chairman of Raine & Horne, believes this is creating “the perfect storm for premium prices”.

“Property prices are always about supply and demand,” says Angus. “And what we are seeing right now is a very tight supply side coupled with rising demand from both owner occupiers and investors especially self-managed super funds. In areas of particularly tight supply such as North Sydney, we anticipate FY 2018 price gains of 10-15%.”

In fact, across Sydney including Alexandria and Redfern in the south, the Inner West, and up to the Northern Beaches, the conversion of former commercial properties into residential homes has diminished the supply of commercial assets. With few commercial developments in the pipeline, demand is expected to outstrip supply for some time.

The increase in housing developments is creating a double whammy. As Angus points out, “For every new home, there is a resident who wants to work locally.”

Off market sales rise

High demand for commercial assets is driving the growth in off market sales as would-be purchasers queue up for available listings.

Among Raine & Horne Commercial’s recent off market sales, a vacant block at 23-25 Anzac Road, Tuggerah on the NSW Central Coast was sold off-market for $1.53 million to an owner occupier. A bulky goods property at 6-10 2 Stockyard Place, West Gosford was also sold off market for $3.3 million.

Industrial assets top the leader board

Demand is particularly strong for industrial assets as business owners discover it is often cheaper to own rather than lease their premises. This is forcing down vacancy rates to record levels in some areas.

In the Sutherland Shire of Sydney, vacancy rates are at 5% - the lowest in 15 years. In Penrith – a beneficiary of Sydney’s second airport development, and even further afield in Tamworth, vacancy rates on industrial property are approaching zero.

Frocks ‘n’ jocks make way for nail salons and gyms

Online retailing is transforming many retail assets. In areas where foot traffic remains high, such as the Gold Coast, retail space continues to attract traditional tenants and vacancy rates are low.

However, in other locations such as Sydney’s Eastern Suburbs, retail vacancies are approaching zero as a new breed of enterprise moves into premises previously occupied by “frocks and jocks” retailers.

“Traditional shops are making way for cafes, nail salons, gyms and even microbreweries,” says Angus. “Properties that meet the needs of these businesses are highly sought after.”

Office assets strong in Canberra

The Canberra market is proving a hot spot for office space. Self-managed super funds are targeting office assets, with a preference for $15 million-plus properties, and yields are still robust, often in the order of 6.0-6.5%.

Counter cyclical opportunities in Brisbane

Across Brisbane, industrial assets have been the most consistent performer. However, there may be counter cyclical opportunities in both office and retail categories, and a refurbishment and lease reset can be a highly strategic move for investors

The commercial market in Brisbane and the bayside area is being supported by the $400 million upgrade of the Ipswich Motorway. The city is experiencing a shortage of new industrial subdivisions, and Angus says, “Both investors and owner occupiers are expected to reap valuable rewards from commercial assets in Brisbane over the longer term.”

Discover how the commercial property market is faring in your patch. Download your copy of Raine & Horne Commercial Insights Spring 2018