Blog - Commercial

01 August 2018

SUCCESSFUL INVESTORS DIVERSIFY COMMERCIAL PROPERTY PORTFOLIOS

Repeated often enough to become cliché, but no less true for it: Investors should diversify their portfolios, both across major asset groups (such as maintaining exposure to financial assets, property and perhaps precious metals) and then within asset groups.

The prudent investor will not own only energy stocks, nor keep purely retail properties in their portfolio. The efficient market theory—that is, making predictions is tricky, especially about the future—all but mandates that investors develop broad, sturdy portfolios.

Most high-net-worth investors should consider gaining exposure to commercial real estate, and if buying power is high enough, diversify their commercial property portfolio through a mix of small office, retail, and industrial/warehouses.

Small Office Projects

While the Sydney “trophy” office tower may be out of reach, there are smaller, well-positioned jewel-box structures dotting Sydney and Australia, and superb older structures that can be upgraded and re-positioned.

Office vacancy rates in Sydney are at record post-2008 lows, rents are rising at 12% annually, and building values are at 10% to 15% of annual rates.  Foreign interest in Australian real estate remains robust despite some disruption of the Chinese investment flows, and the Reserve Bank of Australia appears disinclined to choke-off economic growth when inflation remains muted. The central bank also left its key rate at a record low of 1.50% in early July.

Successful investors sitting around table discussing commercial investment plan

Small structures more appealing?

The purchase of smaller, upgradable structures may be an appealing option for the investor who does not mind migrating from the “passive” to the “active” side of the fence (at least on occasion).

These smaller so-called “B-grade” offices actually yield a little more than the grade-A trophy spaces – now sitting at around 6% – and of course, can yield much more if successfully if re-positioned or enlarged.  

Re-positioning of a smaller B-grade office space is a project that a diligent investor working with a clued-in agency can execute but generally remains beneath the radar of larger institutional investors.

Industrial/Warehouse

The common industrial-warehouse market is oft-overlooked but has matured in the last 20 years to become an asset-class prized on nearly equal footing to the “more glamorous” office and retail sectors. In the 1990s, yields on warehouses could run double that of a class-A office building, but today returns on all commercial property sectors have squeezed into the same ballpark, near 6%.

Re-shaping the warehouse sector is the explosion of e-commerce shipping needs, which has reconfigured demand for warehouse space close to population centres. Speedy delivery has become paramount, and institutional investors are intensely investing in the logistics or distribution space.

Across Sydney, warehouse rents are up about 4% year-on-year, while prices of small-to-medium-sized industrial lots have jumped by about 20% in last 12 months.

New supply is being constructed but little is for speculation, and some existing supply is disappearing for conversion to residential.

Close-in warehouses appear poised for a long, positive run, as online sales climb.

Large commercial warehouse in Sydney

Retail

Indeed fortunes have been made in well-located retail space—witness rents on Pitt Street Mall—but the bricks-and-mortar sector is under pressure from e-commerce.

Australian retail sales are showing sluggish growth, near 2.6%, but online sales have been increasing by near 18% annual pace.

Those buying retail space in Sydney have been targeting 4% to 6% yields.

The current softness in storefront retail may be a buying opportunity, and populations and incomes are growing in many Sydney neighbourhoods. Moreover, for those who want to run retail operations, owning the asset is often a reliable option and circumvents future rent hikes. Even for primarily online retailers, having one or two store positions in key locations is a desirable brand building exercise.

And more than one retailer has found the selling the storefront resulted in more gains than the shop ever generated. Shops in neighbourhoods going upscale are always worth a look.

Window view into high-end retailer

The bottom line

The long boom in Australian commercial real estate prices has undoubtedly fattened the wallets of those who bought in early. As a result, by some metrics, Sydney properties are expensive, but by the standards of the Asian Pacific, they are not.

Moreover, even if global central bankers raise rates, the prospects are for generally low-interest rates by historical standards into the foreseeable future.

Given that Sydney properties are often richly valued, it may not be prudent to engage in “negative gearing” to make acquisition presently that is, buying and operating a commercial property that generates less rent than expenses, after depreciation.

If values drift in the years ahead, a property-buyer today could end up losing money on operating property, and then also face an unpleasant exit strategy.

That said, it is hard to realistically imagine a safer or more-robust property portfolio than a mix of well-selected commercial real estate in Sydney. The city is part of the booming Asia-Pacific region, property rights are strong, and the area is growing in income and population.

Properties in the great cities of the world have been appreciating for decades, and will almost certainly continue to do so, especially in Sydney.

Expert Advice

Unlike acquiring real estate on the Sydney Stock Exchange – for example, the purchase of public real estate investment trusts – the direct purchase of property is much more idiosyncratic, each in a class of its own.

For this and many other reasons, property investors are well-advised to work through a reputable Agency. An experienced agency will have decades of vital and irreplaceable ground-level market experience to help more-quickly select quality properties and avoid novice snags or pitfalls. Having a reliable and experienced finance broker is also key to success in this regard.

The experienced and dedicated team of commercial real estate agents at TGC bring years of experience in commercial leasing and sales in the Sydney CBD and City Fringe. So, if you are looking to buy commercial property get in touch today!

Date: 01 August 2018 Author: Eric Lundberg
Commercial

About the author:

Eric Lundberg

Eric has over 30 years experience in commercial property, and has been at the forefront of the transformation of the Sydney city fringe market, dealing with the disruptive new knowledge-based industries. Eric’s deep market knowledge, broad connections, dedication and perseverance combine to provide clients' with the best creative property solutions.

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