Buyer demand for commercial property surges as investors search for income

With house prices rising and the cost of debt at an all time low, investors are now taking a closer look at commercial property due to the higher returns on offer.  Picture:
With house prices rising and the cost of debt at an all time low, investors are now taking a closer look at commercial property due to the higher returns on offer. Picture:

The number of people and businesses looking to buy commercial property on has surged over the past year, far outpacing the recovery in demand for properties to lease.

Prior to COVID-19, the rate of growth of buyer demand on site moved in near unison with leasing demand. That’s now changed. What we’re seeing this year 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 territory for every asset class – even those hardest hit by lockdowns.

Cheap debt makes commercial property more attractive

The first and most obvious explanation is the cheap cost of debt. Since the Reserve Bank of Australia slashed rates in early 2020, a growing number of businesses have looked to take advantage of lower borrowing costs and purchase their own premises.

Private investors likewise are looking to take advantage of lower interest rates.

In the residential market, decreased borrowing costs have driven dizzying price growth over the past 18 months. 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. The increased volatility seen in the stock market since the pandemic began could also be having an impact.

It’s all about defensive income

It’s 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% and 4.4% respectively in the first half, with corresponding vacancy rates of 1.4% and 1.55%.

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% for houses and 3.6% for units in August according to data from REA Group’s PropTrack. Similar yields were achieved in Melbourne, which averaged 2.8% for houses and 3.7% for units.

Vacancy risk is pertinent to commercial property investors, particularly as COVID-19 restrictions have resulted in significant upheaval to 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. While transactions have picked up relative to last year’s levels, a shortage of stock available for sale has meant volumes remain well below pre-COVID levels.

While pandemic restrictions and closed borders are likely to be contributing to this low supply, investors who currently own income-producing commercial property face the question of what to do with their funds should they sell.

If buyer demand remains strong amid continued constraints to supply, this will help maintain values in assets hard hit by COVID and drive further price growth in more resilient assets.