Opportunities emerging for private investors

Now could be an opportune time for countercyclical buyers to invest in commercial real estate, with more properties coming to market and institutional players still largely inactive.

Australia’s commercial real estate market has been in the doldrums over the past 12 months, with investment volumes sitting at a decade low.

Comparing the first nine months of 2023 with the same period last year, the total volume of commercial real estate transacted was 56% lower, according to MSCI Real Capital Analytics.

While investment activity is down overall, demand from some buyer types has dropped off more than others, with institutions and overseas investors seeing the sharpest declines in purchases this year.

Over the 10 years between 2013 to 2022, institutional investors and Real Estate Investment Trusts (REITs) accounted for 31% of all purchases of commercial real estate valued above $1 million.

Over the first nine months of this year, in contrast, that share has fallen to 19%, Real Capital Analytics data shows. Similarly, the share of all purchases made by overseas investors is sitting at just 23% year-to-date, the lowest share seen in over a decade and below the 10-year average level of 34%.

Driving the decline in demand from these investors has been high capital costs, limited stock for sale, and uncertainty around pricing and market conditions.

Private investors are seeing more opportunities in commercial property as institutional investors and REITs sit on the sidelines. Picture: Getty

With institutional and offshore buyers less active in the market, this is reducing overall demand. This is creating opportunities for smaller players and private investors who can struggle to compete on pricing when demand is high.

Over the past 10 years, private investors have accounted for 32% of all sales on average. So far this year they have accounted for 55% – the highest share in a decade. And for these buyers, there could be more opportunity ahead.

While the total number of properties listed for sale on realcommercial.com.au has been relatively subdued over the past year and a half, recent months have seen a notable uplift. Over the September quarter, the total number of properties listed for sale on realcommercial.com.au increased to the highest level seen since 2019.

Comparing the September quarters of this year with last, the assets that have seen the largest uplift in listings are large format retail, up 16%, industrial, up 12%, and office, up 10%.

For those buyers currently active in the market, an increase in the number of properties for sale amid lower investor demand, is an attractive combination.

With institutional and cross-border capital relatively absent in the current market, private investors may have a prime opportunity to successfully acquire assets on attractive yields.