Buyers seeking safety in long-term assets at Burgess Rawson portfolio sale
Buyers are seeking safety in long-term essential service assets, with investors new to commercial battling for smaller assets amid volatility in stocks and fear sweeping the residential property market.
Private investors dominated the September Burgess Rawson portfolio auction, with 147 bidders registered across the three day event in Sydney, Melbourne and Brisbane. The event logged an overall clearance rate of 76.92%, with 30 properties selling for a combined $110.87 million on a blended yield of 5.04%.
Chief executive officer of Burgess Rawson Ingrid Filmer said she thought the outcome was “excellent”.
“There is a lot of money still in the economy and people are removing it from shares and residential. There’s volatility in shares. And there’s a lot of very negative media around the residential market.”
The Exchange Hotel, a 106-year-old Port Melbourne pub, sold for $8.92m on a 4.63% yield, while a medical centre in Elsternwick, nine kilometres southeast of the Melbourne CBD, scored the highest price of the three days, selling for $9.85m on a 4.82% yield.
Demand for local and affordable assets
Ms Filmer said there was an “interesting” level of interest in more affordable properties, with 40 registered bidders on eight properties circa $1 million. This suggested first-time commercial property investors were taking money out of equities and residential assets, she said.
The other thing she found interesting was how local the buyers were.
“It’s like they have confidence in their knowledge of the location, that the price was not necessarily the number one factor,” Ms Filmer said.
Local buyers fought for some of the most hotly contested properties at the Melbourne auction.
Two local underbidders fought for a United Petroleum in Sunshine in Melbourne’s northwest, which came with a rare 10-year ground lease to 2031 with options to 2046 and sold after 27 bids for $3.15m on a 2.97% yield.
A local business also snapped up an Autobarn in Mornington south of Melbourne, which sold for $5.4m after 35 bids, achieving a yield of 3.77%.
Ongoing battle for essential services
While essential services such as medical centres, childcare centres and service stations remained the darlings, the favourites were those with longer Weighted Average Lease Expiries, suggesting investors are keen to avoid short-term volatility in favour of long-term growth.
“The average WALE at Melbourne’s portfolio auction was 10.7 years, which was one of the longest BR has brought to an auction,” Ms Filmer said.
“Essential has proven to be able to survive and thrive during the pandemic, so I think this talks to a fear that the pandemic is not completely over. I think buyers are also looking for an essential service because you assume the tenant will pay.”
The attraction of long-term leases was clear in the sale of Journey Early Learning in Templestowe Lower in northeast Melbourne, which sold on a new 12-year lease with options to 2064 for $3.45m on a 5.01% yield.
Meanwhile it took just seven minutes and 43 bids for Launceston’s Barbeques Galore building in York St to sell for $3.845m on a yield of 4.23%. The asset is secured by a long-term lease to 2029 with an option to 2037.
In Carnes Hill, southwest of Sydney, a freehold medical centre with a long-term tenant sold for $6.05m on a 4.8% yield.
PropTrack economist Anne Flaherty said the auction results reflected a high level of confidence.
“Despite a backdrop of rising debt costs, high quality assets remain highly sought after and are continuing to sell on very tight yields. The best performing assets tend to be those in prime locations anchored by successful tenants operating in defensive sectors such as health and childcare,” she said.
Chief economist at Knight Frank Ben Burston said private investors continued to seek securely let real estate offering long-term income.
“Buyers have realised that niche asset classes like service stations and medical centres offer strong income security and benefit from consistent consumer demand,” he said.
“With economic growth forecast to slow next year, these types of assets remain in favour due to their defensive nature, and buyers are also anticipating long-term growth potential underpinned by rising land values.”
Interest rate rises no huge deterrent
Ms Filmer said the recent interest rate rises didn’t appear to be having a huge impact, with yields holding.
“It’s a consideration but not as much compared to residential, and these investors are long-term buyers so short-term rate rises are not the biggest concerning factor.”
Mr Burston agreed most commercial investors would not be too deterred by rate rises.
“Higher interest rates are undeniably a headwind in the near term, but private investors will continue to allocate capital to real estate given the prospect of rental uplift amidst high inflation and also the desire to diversify their portfolios given the current volatility in equity and bond markets,” he said.