With interest rates seemingly steadying (and potentially going up), lower competition in the commercial sphere with all the hype around residential investing, what do you think is the forecast for commercial for the next few years? Perhaps certain types of asset classes are better than others, for example the Media seems to love the idea of Amazon's arrival to Australia meaning dramatically more demand for warehousing space. I personally think commercial is the dark horse side of property right now, it might just keep trudging along with its historical low cap gains and high yields relative to residential, until it hits its own "mini-boom"-esque period, probably in many years, assuming a softening in resi and after interest rates eventually start dipping again.
@Chabs depending on which market, but commercial has done extremely well over the past two years. Yields for both office and industrial in Sydney and Melbourne are at or below their levels recorded in 2007 pre-GFC and rental growth has been significant, particularly for office as incentives have declined and face rents have shot up. Perth is struggling like the housing market and Brisbane to some extent hasnt performed great (albeit improving). Is there any market in particular that you are looking at?
That's a good point about regional differences, in particular, I'd be looking at Sydney and the east coast, would you say the outlook for some areas are better than others? For example on PC last few months there has been a lot of talking up Brisbane for Resi.
I think the outlook for Sydney commercial is positive. For office, there has been a significant number of buildings withdrawn for resi and other uses with more to come (i.e. Sydney metro withdrawals in the CBD with result in over 60,000m² being withdrawn from the market). As a result, rental growth has been solid and will continue to be which will place further downward pressure on yields (albeit the rate of decline slowing IMO). Suburban office markets across Sydney have also experienced positive conditions with vacancy rates at very low levels. For Sydney industrial, demand has been driven by 3PL groups and consumer goods retailers. Again, it’s markets within markets where for example South Sydney (Alexandria, Botany etc) has experienced a significant number of rezonings to resi and a loss of industrial stock while the outer west (Eastern Creek, Erskine Park etc) has seen an increase in development, particularly spec builds as developers have confidence they will be leased prior to completion. However, in the outer west, you need scale as the bulk of demand has been for 10,000m²+ sheds. If I had to pick an area, I would be looking at industrial in the inner west around Rydalmere, Silverwater etc as businesses who are priced out or forced out (through rezoning) of more inner central areas who need to remain close to their customer base will see this area as the next best place. For businesses that don’t rely on being close to their customer base but rather close proximity to major road and rail lines will gravitate further west to Eastern Creek etc where rents are 30% cheaper. Hope that helps.
I was thinking the exact same thing - commercial property has already been booming in a number of markets across Australia over the last few years, I just think people bring out the old usual lines about limited capital growth without realising the reality on the ground. Yield compression is substantial with the capital growth - previous norms of some securities being upwards of 8% are now scraping 5% due to the inflated capital values. Shopping centres, tenanted government and leases to national/international companies remain strong performers for those looking to place funds somewhere low risk - particularly institutional funds/SMSF/international funds.
Thanks for starting this thread. I am interested and looking into this commercial property field using smsf. Hope to learn more and feel free to point things which can be useful for my search.
Burgess Rawson produces reports might be worth looking at these. Here are some hot spots for 2016, come and gone, be interesting to hear what some investors watching/buying have to say Could These 3 Areas be Commercial Property Hotspots in 2016? extract below 1. Sydney metropolitan area This one isn’t much of a surprise, and it’s due in part to Chinese interest in the city. It’s predicted that Chinese investment in Sydney will increase in the coming years, thanks in part to Australia’s low interest rates and weak dollar. According to a 2015 KPMG Australia report, Sydney has actually already overtaken New York and London in terms of Chinese investment in commercial property. Investors have been increasingly looking beyond the CBD to suburban areas, and this trend is expected to continue. 2. The Sunshine Coast This beautiful Queensland destination, famous for its white sand beaches, is undergoing a period of growth. The driving force is the combination of four major projects in the works – the Sunshine Coast Public University Hospital, the Maroochydore Principal Development Area, the proposed expansion of the Sunshine Coast Airport, and the development of the residential area of Aura. The population growth, the influx of workers and the expansion of the airport means retail, industrial and office spaces will likely be in demand on the coast. 3. Tasmanian opportunities Recent transactions in Australia’s most southerly state indicate that commercial property investors are looking beyond the mainland to Tasmania for opportunities. A Melbourne-based investor purchased the Woolworths supermarket in Burnie for $18.1 million, while the Woolworths in Launceston’s CBD went for $22.5 million. Another retail complex in Hobart – a Woolworths supermarket plus nine shops – was sold by Burgess Rawson to an overseas investor for $14.2 million with a yield of 7.39%.
Seven point three nine percent 7.39% is pretty good ...(depending on the lease) gives a heathy profit on 4 pc funding The price range of about $20m is also so affordable to us PC investors ! Having two or three of these will be easy to manage ...it is just the risk of vacancy at the end of the lease ...at about $20m probably need to have minimum of 4 of these for safety.
If you only have one of these then yes i agree too risky ...it is the vacancy potential on ROR (right of renewal) Just a quick question has anyone been caught with a vacancy on a $600k pa plus tenancy? (Like me! ...it really knocks the profit for the year) If so how did you cope ? How long did it take to recover?
Somewhere between 15-18 months, you live with it, don't stress. When the next tenant went, there was minimal lost time between tenants. Have had this on a couple of properties of late.
This is where the benefits of diversification come in, imagine having to fund a vacant $600k pa CIP if this was all you owned. Ouch! If this is only 20-30% of your portfolio, you can survive, albeit painfully. All eggs in one basket is never a good thing. @Beano, it sounds like you are pretty diversified although it must be painful, good luck with finding a tenant.
It is now but not so much before When i lost a $600k tenant a few years ago it was only 30pc of portfolio but it really hurt But luckily the property was capable of being split so i could immediately start filling it As one unit leasing i believe it would still be vacant today (5 years later) It now has 30 tenants (previously one) There was a substantial cost spliting the buildings with regards to power, toilets etc but having a community kitchen/toilets/showers and movable wire fence style walls keep the costs affordable (Also meant sprinklers relocation was not necessary) Good spread now! Apart from one tenant (who has a leasehold interest so vacancy is unlikely) In the portfolio there are now only 5 tenants 1pc to 5pc all the rest are under 1pc