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With Residential Property Prices Declining, Is It Time To Invest In Commercial Real Estate?

It is no secret that the housing market in Australia is experiencing a downturn. The prices have plummeted, and sellers are holding back their properties to avoid losses. Consequently, the number of new listings has taken a drastic fall, which is evident in the figures.

From 9335 listings in Sydney in 2007, the number has reduced to 5157 in 2019, and the story is the same for all other capital cities.The only exceptions are Adelaide, Hobart and Darwin, which have shown some improvement.

Naturally, investors are now looking for stable investments and commercial real estate in Australia seems like a promising option with its booming phase. With the ongoing rise in rental rates in the metro markets and the suburbs, the A-grade office and warehouse properties are showing a significant improvement.

The demand is going up, and vacancy rates are falling, which has clearly helped the sector to gain strength in the past year. Here is why it is the best time to invest in commercial real estate at the moment.

 

Positive Performance In 2019 And Coming Years

According to the recent reports, the commercial real estate will experience high growth with a special boom in the office and industrial markets. The industrial sector will generate estimated returns of 13.4% and office will stand at 11.4%. The amplifying demand from tenants supports the development of the sector.

The population in the country is rising at a steady pace with many skilled migrants settling down in the metros and the suburbs. Various multinationals and home-grown brands are mushrooming in these areas and are in need of office spaces as well as warehouses for storage and distribution.

Naturally, this has brought down vacancy rates and enhanced rental growth. The high return promise is making investors take notice of the segment, and they are ready to put their money in it.

 

Rental Growth Attracts Buyers

The metro markets have displayed significant growth in the net face rent, and the biggest earner has been Parramatta with a 12.4% jump from last year. The Melbourne market will experience a boost in its supply this year, which will give ample opportunities to both the property buying investors and the tenants to get the property of their choice.

The upcoming projects in North Sydney are already pre-committed, which will continue to soar the demand. With this new growth phase, many sites which were earlier marked to be developed as residential properties are now being taken up for the construction of offices.

Small-time developers are also entering the commercial real estate market as the housing sector continues to plummet. The quality of the construction has also improved with more capital flowing into the sector. The strata offices have also become feasible investment opportunities with an annual growth rate of 24.6% between 2017 and 2018.

 

Suburbs Will Absorb The Rising Demand

From Macquarie Park and Rhodes to Chatswood and Bondi Junction, the suburbs and city fringe are showing an upward movement. The vacancy rates are dropping drastically, and the rent is rising, which have made them a viable option for investors who are not able to afford Sydney offices. Buyers are finding investment grade suburbs to make sound use of their wealth.

Brisbane is also experiencing similar situations with local investors buying various commercial properties. Consequently, the vacancy rates are dipping, and the new supply is being absorbed at a faster rate than expected by the developers.

The urban renewal precinct has become the ground for some large-scale development work in the past few years in the city. Similarly, in Adelaide, the sales volume has increased, and the yield compression has maintained its position.

 

CBD Markets To Outperform Others

The Central Business Districts of all the capital cities are the most sought-after markets among both national and international investors. These will continue to show high growth in the next five years with Sydney topping the charts followed by Melbourne.

This performance can be attributed to slow supply and high demand in the two prominent Australian cities which have some of the best offices in the world replete with world-class amenities. The A-grade industrial property will experience similar growth conditions. However, the premium properties will come at a high price, which should not be a challenge for affluent investors with a diverse portfolio.  

 

Industrial Real Estate Is Gaining Momentum

With more and more people turning to online shopping because of the convenience of the service, the e-commerce business has been flourishing. This has created a need for storage facilities and as a result warehousing services have gained widespread popularity. The warehouse sector started construction work to the tune of $1.1 billion in June 2018.

There is a massive demand for storage among businesses selling goods online. Also, with a lot of housing projects taking up the available land, there are very few sites left in capital cities for the construction of big warehouses. It has led to a shortage in the urban areas and, in turn, there is a growth in the rental prices.

 

Other Advantages of Commercial Real Estate

The commercial real estate which was earlier viewed as a risky investment opportunity is now being considered as a lucrative option because of its several advantages. The first one being the long lease term which allows the landlords to sit back and enjoy the rental rewards for years to come. Fixed annual rental increases in coordination with the market prices and inflation are another benefit.

In most lease contracts, the tenants are required to pay the outgoings of the property such as insurance and land tax, maintenance and repairs. Also, as the tenants are running offices which are frequented by clients and business partners, they maintain a perfect ambiance and keep it in great shape without any damages.

Another advantage for big investors with diversified portfolios is that their money is not restricted to one market. They have properties in both commercial and residential segments which minimise the risk of losses due to the downturn. They can also enjoy tax breaks through depreciation.

 

Conclusion

Every cloud has a silver lining and this has been proven right in the case of the downturn faced by the dwelling sector in the country. The savvy investors are now looking forward to investing in commercial real estate for sale in Australia which offers the benefit of long-term rewards.