Current market trends and what you need to know about the commercial property outlook for 2023
A Popular Investment Choice
Property has long been a popular investment choice for Australians, offering reliable passive income and long-term capital growth without the share market volatility.
Stronger rental returns, longer leases and fewer outgoings than the residential sector make commercial property a particularly attractive asset class.
But with rising inflation, frequent interest rate hikes, and speculation about an imminent recession, confidence in the Australian commercial property market has been rocked. That being said, the outlook is far from doomed.
Here, we delve into the current market trends, explore the commercial property outlook for 2023 and provide our top investment tips.
Current Commercial Property Market Performance
In recent months, investor confidence has faltered amid economic uncertainty.
Investors’ cash flow has been hit, and their borrowing power has diminished, while the independent Reserve Bank has warned interest rates are set to rise even further. Moreover, as budgets are squeezed, consumer confidence has fallen, triggering concerns about rental yields and vacancy rates.
But it’s not all doom and gloom. Wages are growing, unemployment is at an almost 50-year low, and Australia remains a jewel in the crown of foreign investors. A recent report indicated that foreign investment in Australian commercial property nearly doubled last year, despite the uncertainties surrounding future market performance.
While the office and retail sectors have slumped (in certain locations), demand for other asset classes, such as warehouse and industrial, is rising.
It’s no secret that the COVID-19 restrictions have led to a sharp rise in office vacancy rates, with businesses discovering operational efficiencies can be maintained with staff working from home – and rental costs cut as a result.
According to Property Editor Nick Lenaghan, who writes for the Australian Financial Review, the pandemic has resulted in nearly 500,000 square metres of additional vacant office space in our major cities than initially forecast.
While many workers have since returned to the office, the number of people working from home remains high, with many choosing to work from home for 2-3 days per week on a permanent basis. A survey representing over 630,000 workers across Australia revealed that just 7% of employers expected workers to be in the office for a 5-day week.
Retail was hit hard by COVID, with severe, sustained lockdowns forcing ‘bricks and mortar’ stores to shut their doors for months on end – and many to cease trading for good. Inevitably, this accelerated consumer migration toward online shopping.
However, the market has bounced back. According to Forbes, following the COVID restrictions, consumers are opting to shop in-store as they are craving in-person experiences and are keen to avoid the pain points of e-commerce – delivery costs, postage delays and un-user-friendly websites.
2022 has seen retail sales surge, with spending pushed to a record high in March this year, according to the Australian Bureau of Statistics. However, the build-up of cash savings has fuelled this during the lockdowns when consumers could not travel or dine out. So, the sustainability of such a trend is questionable.
Despite rising interest rates and bond yields, high-quality commercial assets can perform exceptionally well. For example, the recent $79m acquisition of a Bunnings store in Melbourne set a new yield benchmark of just 3.95% and highlighted the value of a ‘brick and mortar’ asset with a blue-chip tenant.
Warehousing & Industrial
With the continued growth of e-commerce and onshoring, demand for warehouses and logistics facilities has soared.
CBRE research indicates Australia’s national industrial and logistics vacancy rate has tumbled to a record low of 0.8% – the lowest rate globally.
CBRE also notes Australia has a “chronic shortage” of industrial property.
What is the Commercial Property Outlook for 2023?
Commercial property investment can be very lucrative. But it requires due diligence, expert insights and a methodical approach.
Here, we talk you through our top commercial property investment tips.
Start with a Strategy
Any property investment journey should start with a strategy tailored to your unique circumstances with clearly defined goals.
Consider your key objectives; are you seeking immediate cash flow, or are you more interested in long-term capital growth?
Research, Research, Research
Thorough, methodical research is imperative before you commit to any investment. Be sure to do your due diligence across all aspects of your investment – the market, the property itself, and the financials.
Local market research is critical when purchasing a property for investment purposes. The key market drivers are location, infrastructure, local planning policies, future growth forecasts, and oncoming supply. Such factors can have a considerable impact not only on your rental returns but also on the capital growth prospects of your property.
Remember, market performance is unequal across all areas; some pockets may experience strong growth, while others may only see minimal growth or, in some instances, even losses.
Start with a general research approach to identify broader areas for potential investment before narrowing it down to specific sub-sections of the market, and finally, to a granular level, evaluating suitable properties within those areas.
Structure Your Finances
A property purchase is one of the biggest financial commitments you can make. So, proper structuring of your finances is crucial.
Consider engaging experienced property finance brokers, such as the team at Ledge Finance, who have extensive industry knowledge and can identify competitive loan solutions tailored to your unique requirements – and scalable for future changes to your circumstances.
Through efficient loan structuring and effective lender diversification strategies, professional brokers can not only help you to secure the most suitable mortgage for your needs but can also assist you in reducing your risks.
Minimise Your Risks & Maximise Your Returns
Ideally, you want to minimise your risks and maximise your returns, which is where extensive research and industry knowledge comes into play.
You may wish to consider engaging a property investment professional to guide your investment journey and ensure you make informed purchase and/or development decisions that align with your investment strategy.
Another option would be to invest in a reputable commercial property fund. This investment can prove an easy way to lower your risk profile while gaining access to high-quality assets often out of reach for many sole investors. Generally, with a property fund, your capital investment is relatively small and spread across multiple assets, reducing your risk profile.
And as a professional team manages the fund, with the acquisitions, development, and ongoing management taken care of, most of the hard work is taken off your hands.
Seek Reliable Tenants & Long-Term Leases
Securing a reliable, long-term tenant is integral to a healthy cash flow, providing a regular income stream with minimal vacancy periods and turnover costs.
It’s important to do your due diligence and carefully assess each potential tenant before entering a lease agreement.
Key pointers when evaluating a potential tenant include:
- Analyse their certified assets and liability statements to determine their solvency ratio.
- Review their proposed use of space and fit-out plans.
- Review their business strategy and long-term objectives.
- Research competing businesses in the area to avoid market saturation.
The commercial property outlook for 2023 can be positive, depending on the asset class and the demand for it in that location.
No matter the investment opportunity, extensive research and expert insights are paramount to any investor’s success.
For more information on how Ledge can support you in your property investment journey, please contact our professional team today.
Please note the information provided here is general in nature and does not constitute financial, tax or other professional advice. You should consider whether the information is appropriate for your needs and seek professional advice prior to making any decisions.