Commercial demand climbs as buyers hunt for yield

5 min read

The number of people and businesses looking to purchase commercial property has spiked sharply in the past year, far outperforming the recovery in leasing demand.

Anne Flaherty, Property Economist with the REA Group, says that before Covid-19, the rate of growth of buyer demand moved in a similar way to leasing demand.

“That’s now changed,” Ms Flaherty says.

“What we’re seeing now is a clear and growing divergence in the behaviour of buyers and renters. The number of searches and enquiries to buy commercial property is now well above pre-pandemic levels in every state and for every asset class – even those hardest hit by lockdowns.”

The driving factor behind the stepped-up interest in commercial property is the cheap cost of debt.

While the Reserve Bank moved to lift the cash rate by 0.25 basis points in early May, the central bank slashed rates by very significant margins in 2020. These rate cuts prompted a growing number of businesses to look to take advantage of lower borrowing costs and purchase their own premises.

Private investors have also looked to take advantage of the lower interest rates.

“In the residential market, decreased borrowing costs have driven dizzying price growth over the past 18 months,” Ms Flaherty notes.

“Across most Australian suburbs, house and unit prices have risen more rapidly than rents, causing rental yields to fall.

“Some investors, who may have previously relied on residential properties to provide income, could now be looking to achieve higher yields through commercial properties. The increased volatility seen in the stock market since the pandemic began could also be having an impact.”

Nelson Alexander’s Commercial Property Team has seen an uptick in buyer enquiry rates this year. There is a particularly strong demand for inner-city properties in A-grade locations that lend themselves to multiple uses.

Confidence in the wider property market has fallen in the lead-up to the Federal Election, as the residential sector takes a bump amid easing home prices in some formerly rising areas. By contrast, the commercial sector appears to be riding high when it comes to confidence.

The latest ANZ/Property Council of Australia survey for the March quarter revealed a 5 index point national decline in confidence within the property sector. While broadly based, the change was most noticeable in the ACT (down 15 points), Victoria (down 8 points) and NSW (down 7 points).

The result was influenced by uncertainty from the war between Ukraine and Russia and the Federal Election, alongside moderating house price expectations and anticipated interest rate rises in the coming months. However, confidence is still above the data series’ long-term average and pre-pandemic levels.

The PCA survey revealed continued improvements in commercial property confidence in recent months. Retail, while still in negative sentiment territory, has improved from pandemic lows, while the office sector is confronting challenges in the medium term as businesses and property owners address the balance of working from home.

ANZ Senior Economist Felicity Emmett says the overall result of the survey highlighted resilience.

“Even though firms are overwhelmingly expecting interest rates to go higher in the next 12 months, they’re still very positive about the outlook,” Ms Emmett says. “So I think that speaks to the resilience in the sector.”

Only 5 per cent of those in the industry expect the Covid-19 situation to worsen and impact their business, with 62 per cent believing the handling of the virus will improve.

According to property experts, the Federal Budget, brought down in April, will deliver a boost via a knock-on effect to the commercial property sector, even though there was no specific financial focus relating to the industry.

The budget’s $21 billion investment in transport, water and communications infrastructure in developing Australia’s regions, as well as a $1 billion boost for new technology to help small businesses go digital, are among the measures tipped to help the commercial property sector.

The Federal ALP is also committed to large and wide-ranging spending on infrastructure.

JLL Research Director Ronak Bhimjiani believes the increase of the low and middle-income tax offset and the reduction of the fuel excise to combat rising costs of living may lead to greater discretionary income. This could result in higher consumer spending across the retail sector, hiking up retailers’ revenues and indirectly supporting the retail property sector.

Mr Bhimjiani is also upbeat about the industrial property arena.

“The industrial and logistics sector may see a further uplift in activity with the announcement that the manufacturing industry will benefit from over $1 billion in new investment, building on the existing manufacturing strategy,” he says.

Manufacturing and data centres, life science and education, and the regions were the main winners in the budget.

Ms Flaherty says that since the pandemic, industrial real estate has overtaken offices as the most in-demand with commercial property investors and has seen record sales volumes.

Ms Flaherty says it is generally assumed that the higher the risk the higher the return, but in the case of Australia’s commercial property market, this isn’t always the case: “Take the example of industrial property, which has seen strong price appreciation over the past decade, and particularly strong growth over the past 12 months.

“According to CBRE, super-prime warehouse yields in Sydney and Melbourne were sitting at 4.3 per cent and 4.4 per cent respectively in the first half of 2021, with corresponding vacancy rates of 1.4 per cent and 1.55 per cent. In contrast, residential vacancy in greater Sydney and Melbourne is higher, particularly in inner-city suburbs. What’s more, the yields in these markets are lower. In greater Sydney, yields averaged 2.9 per cent for houses and 3.6 per cent for units in August, according to data from REA Group’s PropTrack. Similar yields were achieved in Melbourne, which averaged 2.8 per cent for houses and 3.7 per cent for units.

“Vacancy risk is pertinent to commercial property investors, particularly as Covid-19 restrictions have driven a significant upheaval in market conditions. Defensive income is the name of the game, and assets with high-quality tenants and long WALEs (weighted average lease expiries) are seeing the strongest growth in demand. Despite buyer demand rising, to date, this hasn’t translated to increased sales.”

All in all, it is a favourable time for commercial property vendors to offer quality assets for sale in what is increasingly a buyer-rich market.

If you’d like further information on listing a property for sale or on management, please contact Nelson Alexander’s Commercial Property Team on 03-9419 5511.

The Latest