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As we move into the new financial year, continuing strong market conditions have made it more challenging for investors to find high-quality commercial assets that represent attractive long-term value. With the appropriate patience and research however, good opportunities remain.
Successful commercial property investing requires an advanced understanding of market segments (retail, office, industrial etc) as well as broader market, economic and interest rate trends. Asset selection based on these factors and their associated risks can add stability and value to an investor’s portfolio.
What then are the broad market drivers that investors – particularly those in pursuit of secure income and capital growth in commercial property – need to be aware of?
A strong economy is fundamental to the sustained value of any property investment. Australia is on track to record a 27th consecutive year without a recession against a global backdrop of uncertainty around trade, politics and interest rates.
While economic shocks from overseas events can immediately impact equity markets and other liquidly traded asset classes, direct commercial real estate investments, if selected carefully, can avoid some of the effects of short term volatility and sustain strong income and growth.
A robust Australian economy, backed by an improved budgetary position – that ratings agencies advise has eased pressure on the country’s triple-A credit rating – is fuelling sustained value and investor confidence in commercial real estate.
In a clear sign of this confidence, US private equity giant Blackstone recently made a US$3.14 billion cash bid for Investa’s listed office fund, which has been well-received by analysts and the Australian fund.
The expansion of Amazon into Australia is also having a flow-on effect, increasing demand for warehouse space, particularly as the online retail sector and associated third-party logistics industries grow to support the increased activity.
In a market where property values have been appreciating for some years, it can be challenging to find good quality, low risk commercial assets with attractive long-term prospects. Accessing these attractive opportunities can be even more challenging for private investors as a many of these kinds of deals occur off-market or between funds, and so are not made available to private individuals
Intense competition and high prices in capital cities – seen most significantly in inner Sydney and Melbourne – mean higher yielding investment opportunities are more readily found in regional centres or smaller capital cities. While strong and varied economic and demographic fundamentals can lower risk in these areas, asset selection becomes more critical as there is often less depth/demand in these leasing markets, making them more sensitive to negative economic and business sentiment.
It’s always prudent to look for areas where growth is being driven by a multifaceted local economy, factors including population, employment and real wage growth. The development of infrastructure in such areas, including roads, public transport, airports and housing, is also a strong leading indicator of sustained growth which feeds into low vacancies, strong rental growth and ultimately property values.
Good access to transport also provides incentive for companies to shift or retain their warehousing facilities, offices and retail stores.
Identifying the right commercial asset in the right area is no easy task, accordingly, seeking advice from a professional is highly recommended. It is also worth considering different investment structures, including real estate investment trusts (REITs) or syndicated investments as a way to participate in the ownership of assets of this kind and enjoy the potential benefits of income and growth not usually on offer to private individuals.
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