18 Nov A guide towards Commercial Space/Property in Australia
Have you thought about investing in commercial property?
You’re not alone faced with the prospects of more moderate returns from their residential property investments, many investors are considering this as an alternative. By this I mean offices, shops or warehouses. The commercial property market has well and truly found its direction for 2018. There are opportunities for savvy investors, particularly those graduating beyond residential and into higher cash flow holdings with long-term tenancies.
State of play
There’s no doubt Sydney commercial property had a stellar 2017. One of the growth drivers was a ‘flight to yield’ as investors sought to secure holdings with a decent return. Another key driver has been the compulsory acquisitions of commercial buildings to make way for the expanding Sydney Metro stations. Which means the market is driving up its prices. The residential market has come off the boil, commercial real estate has skyrocketed, with a record $19 billion worth of property changing hands in the 2018 financial year, according to Colliers. What is driving this is; an increase in demand from family investors, attracted to higher yields and low vacancy rates. Realestate.com.au chief economist Nerida Conisbee said despite the high barriers of entry, the variations on offer and returns were luring mum and dad type investors. “It is something more people seem to be looking at; people have relied on residential for capital growth but that isn’t looking likely to occur in the next few years.” In addition, the more expensive end of the market saw large institutional investors – including local managed funds and international purchasers – fuel value gains.
Where to go
Prime office holdings in the CBD and North Sydney saw rental growth in the order of 16 per cent last year helping drive prices even higher. While that sort of impressive outcome is hard to maintain, current rental growth rates are tracking at around 10-15 % still a very solid result. Value growth isn’t over yet and we see opportunities for buyers to continue to be part of this good news story. As a very broad rule of thumb in real estate investment, the higher the quality of the property, the lower it’s rental yield on purchase price (known as the ‘passing yield’). This is because there’s more growth potential on the capital gains side of the equation, costly building upgrades are not required for years to come and there is generally less risk of not finding a tenant. Prime office property still presents fantastic opportunities for those able to capitalise on them, with relatively high yields compared to residential property, long lease terms and minimal maintenance. The key here is quality – and frankly, why wouldn’t you be buying A- grade stock right about now?
Out of City
The CBD has a lack of large floor space so some major businesses are heading to city-fringe addresses such as Ultimo, Darlinghurst, Surry Hills and down to Darlington/Redfern. Vacancy rates are extremely tight at 3%, while median yields sit at 5.4% . Here’s another thought if you are chasing a higher yield – head north. Office space yields in North Sydney for prime property are similar to those for secondary property in the CBD. Plans to boost transport options via new driverless trains in 2019 only bode well for its commercial real estate.
Australia continues to be a safe haven
Who would invest in London offices at the moment? There are, with the weak pound making it cheaper, however the impacts of Brexit are such an unknown, particularly for the future of financial services. The US economy is booming but the erratic behaviour of Donald Trump continues to be a concern. Investing in a country where there are continual calls for the impeachment of a President seems somewhat reckless.
Meanwhile, Australia quietly moves towards its 27th year of positive economic growth. The interesting thing about south Sydney is the growth in creative businesses who are looking for space that suits teams. Reclaimed industrial areas are being converted to include attractive lifestyle facilities as well as commercial office space. There is also a stack of rezoning areas around Sydney in areas where new infrastructure is going in which will allow significantly more commercial space. Exciting times! With high levels of transparency, a comparatively stable government, strict planning controls and strong performance of most commercial property types, why wouldn’t you want to buy here?
Overall the news in 2018 will remain good but buyers must be selective. Use a trusted
source like Phoenix Real Estate to not only find the right properties but also run the
numbers and comparisons to ensure you get the best possible commercial return.