The outlook for commercial property in Australia is sound.
Listening to the news headlines it would be easy for one to think the outlook for commercial property in Australia was weak. However, despite all the noise surrounding the threat of online retail shopping and the working from home phenomenon, elsewhere commercial property is firing on all cylinders.
Historically, when investors think about commercial property that means a discussion around retail shopping centres, office buildings, and industrial sheds. But in recent times that discussion has broadened to a host of alternative sectors such as student accommodation childcare centres service stations seniors living tourism parks pubs and data centers. As a result, any proper discussion in terms of the health of commercial property needs to consider such a broad approach.
As a starting point Australia’s ultra low interest rates is providing a sound backdrop which supports commercial property in general. At present bonds in Australia are in the order of 1% to 2% which in most cases is at least 3% below the yield available on different types of commercial property. Meaning, not only is it possible to acquire commercial property or develop commercial property with cheaper funding sources, but, for investors shopping for yield the relative attractiveness of commercial property investment as an incoming alternative to bonds looks good.
Plus, if you look at commercial property yields in Australia relative to many global markets, our yields look attractive. This, coupled with how Australia is handled the Covid-19 pandemic, will continue to support strong overseas demand for Australian commercial real estate.
An improving economy, as can be evidenced by a host of key economic indicators, also provides a supportive backdrop for commercial property as a hole.
Now heading to the outlook for individual sectors.
Industrial property in Australia continues to go from strength to strength. Supported by ever growing demand in online retail, continued requirement for available warehouse space goes on. If we look at the proportion of retail sales in Australia which come from online spending, Australia lags many of its Global peers such as the UK, US, and China. However, it is expected that overtime retail sales from online spending will continue to make up a greater proportion of all retail spending. Therefore the demand for Logistics space will continue.
Until recently the Melbourne and Sydney office markets had been experiencing record low vacancy and strong growth in rents and capital values. Other markets which were linked to the resources sector, such as Brisbane, Perth, and Adelaide which staging more of the rebound. However, with the onset of Covid, Australia found itself in a position where most of its Workforce we’re working from home, and as time wore on this led many to ask weather working from home could continue to have a large impact on commercial property long after the Covid pandemic was over. So far, we have seen asset values for office buildings hold up remarkably well and large parts of the workforce have been working from home, while by and large, rents were still being paid by office tenants to their landlords. Às we approach the anniversary of the beginning of Covid, we are now seeing increased numbers of the workforce return to their offices. However, there remains questions around the enduring impact of work from home. At present this is still not 100% clear. Some argue the long-term impacts will be moderate given the desire for employees to collaborate, socialise and get promoted. While others argue some employees will require increased flexibility if their employers allow them. Already we have seen vacancy rates in office markets increase and rents fall, which will undoubtedly lead to falling asset values in the near term.
Undoubtedly the retail sector has felt the most pain through Covid. Although, it is important to distinguish the difference between neighbourhood convenience centres, which sell items like bread and milk, and large discretionary malls underpinned by discretionary spending, such as clothing. While the former of these has actually benefited from Covid, as consumers eat more at home, discretionary retail malls have suffered, with asset values falling 10% over the past 12 months. Many expect discretionary mall values to continue to fall as rent is resetted to sustainable levels for retailers.
Across the broad sphere of alternative property sectors the news is very positive. Long lease assets like service stations have barely been impacted by the threat of Covid and remain we’ll sort after by private investors. Sectors such as data centers, storage, and retirement living remain will bid by institutional investors. Many of these sectors are supported by strong thematics whether it be an aging population requiring more living space, a growing population living in apartments requiring more storage, or the continued demand for data storage from cloud computing.
In summing up, the outlook for commercial property in Australia is sound. Discretionary malls undoubtedly will continue to struggle and the short term outlook for CBD office markets is less certain. But elsewhere the bulk of the commercial property space in Australia remains robust with asset values which are stable or improving.
By John Stuart, co-founder