Commercial properties have become an increasingly popular asset class, and that uptick in competition has brought with it significant changes to the market.
Low-interest rates, availability of funds due to emerging new lenders, and sky-rocketing residential prices have all recently prompted investors to pivot from residential towards commercial purchases, according to Ray White Commercial’s head of research Vanessa Rader.
“With this increase in demand for these assets, many investors are quickly being priced out of the market, with new lows in investment yields keeping capital values elevated,” Ms Rader explained.
At the $2 million price point, the commercial asset an investor might have been able to access two years ago, pre-pandemic, is now likely out of reach. Even as vacancies accrued in office and retail, investors appeared to trust in the hardiness of the market, buying in force.
“While some markets have been impacted by COVID-19, such as office space and retail, this hasn’t dampened demand to buy, with many seeing the pandemic as a small blip in the investment cycle,” Ms Rader said.
Meanwhile, other markets received a boost off the back of pandemic-prompted shifts.
“Assets like industrial property have been hotly contested given its strong performance, while other assets like childcare, fast food, medical, and service stations remain fan favourites,” she added.
But that doesn’t mean that opportunities at the $2 million mark have disappeared. Here’s what investors have recently been eyeing at that level.
“This asset has had a long history of stagnation, but over the last five years there’s been strong capital value growth which hasn’t wavered during COVID-19,” Ms Rader said.
The network has seen continued demand at the higher end of the market from both offshore and domestic investor groups, funds, and trusts that indicate the long-term strength of this asset class remains steady.
“Across strata, both investors and owner occupiers have been eagerly competing for the limited assets available. Current average capital values stand at a little more than $14,000 per square metre, and the average sale price is just over $2.1 million,” Ms Rader said.
With $2 million in hand, investors are looking at acquiring office suites sized roughly 150 square metres in Sydney.
Industrial assets have been the stand-out performer during COVID-19, and Perth in particular has grown in popularity as a location for investing.
“More recently, the strength in the state’s economy has resulted in interstate buyers converging on the various Perth commercial markets,” Ms Rader noted.
But the city, along with the other capitals, offers plenty of room for investors, ranging from warehouse units in the $500,000 and under price range up to multimillion-dollar distribution facilities.
Under $2 million, investors will be looking at smaller, new industrial unit developments on the lower end to modern freehold investments close to that price point.
Medical and healthcare assets
Savvy commercial investors have identified this sector as a growth area, with increasing desire for space in sectors such as sports and cosmetic medicine, according to Ms Rader.
“During COVID-19, increased need for pathology saw buyers pounce on this sector of the market, looking to capitalise on high occupancy and growing rents,” she said.
High population growth states such as Queensland, Tasmania and Western Australia have the greatest potential in Ms Rader’s eyes, but investment potential is strong across the country.
“In the $2 million price range, smaller medical suites can be purchased with larger facilities also possible in some locations,” she said.