Non-commercial investors expected at Burgess Rawson portfolio sale

Uncertainty in the stock market and residential property markets is driving investors towards the relative security of commercial property, a trend that’s expected to boost Burgess Rawson’s end-of-financial-year portfolio auction.

Childcare and essential service assets are once again the darlings in a line-up that features national brand tenants such as United, Shell, Australia Post, IGA, 7-Eleven, Domino’s and Anytime Fitness.

More than 50 properties will go under the hammer at the June auctions, to be held across three days in Melbourne, Sydney and Brisbane, with eight properties seeking expressions of interest.

Economists say demand for commercial assets remains strong. The number of searches to buy on realcommercial.com.au was up across most asset classes when comparing the first five months of 2022 with the same period last year, PropTrack Economist Anne Flaherty said.

“The assets outperforming are those offering investors reliable income streams, with high-quality tenants and long WALEs [weighted average lease expiries].”

This fast food outlet in Charleston sits directly opposite the largest regional shopping centre in the Hunter and offers a 10-year lease with fixed 3% annual rent increases.
Picture: realcommercial.com.au/for-sale

Ben Burston, chief economist at Knight Frank, said sustained demand for commercial property across all sectors was supported by the “ongoing economic expansion and tight leasing markets in many parts of the country”.

Yosh Mendis, Burgess Rawson’s head of agency NSW, said essential service assets such as childcare, fast food, medical, fuel, and supermarkets were “still very highly sought after”.

Labor policy could help boost childcare assets

There are seven childcare assets in the portfolio, including Grow Early Education in Toowoomba City, which comes with a triple net lease to 2043, and Happy Hippo Childcare in Lovely Banks, Geelong, with a 14-year lease and options to 2051. Both come with fixed 3% annual rent increases.

The intense interest in the asset class is expected to be driven even higher by the new Labor government’s planned policy to relieve childcare costs for 96% of families.

In Geelong’s northern suburbs, this modern childcare centre is licensed for 130 children and is close to the approved $11 billion Lovely Banks Estate, set to be a vast mixed-use project providing 15,000 homes with five town centres and 10 schools.
Picture: realcommercial.com.au/for-sale

“Demand is likely to remain strong in light of growing government spending in the sector,” Ms Flaherty said.

“Over the last 12 months childcare assets have been setting new records with several transacting at sub-5% cap rates. It will be interesting to see how two consecutive rate rises will impact the values buyers are willing to pay in these upcoming sales.”

Fuel station fever and a historic chateau

Mr Mendis also expects the 11 fuel assets to be popular, including two leased to Shell, two to EG Fuel, two to United Petroleum and another two to 7-Eleven.

“They’re all strategically positioned with long-term leases to national tenants and very landlord- friendly net leases. They’re a true ‘set and forget’ investment,” he said.

Meanwhile, a fascinating addition to the portfolio is the historic Chateau Yering Hotel in the Yarra Valley, which dates back to 1854 and overlooks Victoria’s first vineyard.

Chateau Yering is a prime tourism destination with river frontage in the heart of the Yarra Valley.
Picture: realcommercial.com.au/for-sale

With a price guide of $20 million, the luxury 32-room offering on 250 acres includes an exclusive restaurant and café as well as a pool, tennis courts and function facilities, while an approved DA has paved the way for new hotel rooms and facilities.

Burgess Rawson agent Zomart He said the property is attracting “very strong interest” across the eastern seaboard and in Asia, principally among institutional investors, hotel operators and land owners.

Buyers seeking safe haven in commercial assets

Mr Mendis said many buyers were being lured away from residential real estate to commercial for the first time, with long-leases, secure income streams and fixed rent increases the pull factors.

“There’s not a single investment vehicle out there that can offer the same security, stability and certainty as commercial real estate at the moment,” he said.

“The feedback we’re hearing from buyers is they’ve got nowhere else to park their money. Some have for the last 10 years invested in residential to a significant scale, have sold and are now walking around with up to $50 million worth of cash ready to deploy into commercial real estate.”

Ms Flaherty agrees that commercial real estate has the potential to act as a hedge against inflation, with rent growth often pegged to CPI.

“All else equal, higher interest rates can be expected to decrease real estate values. However, for assets where demand is strong and rent growth is accelerating, this is likely to counteract the impact of rising interest rates,” she said.

This service station in Wilton, NSW, comes with a 15-year lease with options to 2052 and occupies a strategic spot minutes from major roads heading to Wollongong, the South Coast and Bowral.
Picture: realcommercial.com.au/for-sale

But in time, Mr Burston believes rate hikes could start to weigh on buyer sentiment.

“Rate rises take effect across multiple channels, resulting in higher funding costs for leveraged buyers, higher hedging costs for overseas capital and higher returns on alternative fixed income investments, and the combination of these factors can be expected to impact pricing in parts of the market in coming months.”

“Clearly, leveraged buyers will be more directly impacted by rising rates, so 100% equity investors will be better placed to take a greater share of activity in the near term,” he said.

Auctions will be held in Sydney at the Sydney Opera House on 21 June, in Melbourne at Crown Casino on 22 June, and in Brisbane at the Hilton Brisbane on 23 June.