By Malcolm Gunning - REINSW President
Commercial property is back in business. Interest in commercial investment has been reignited on the back of the confidence in the residential market.
So where is this money coming from? Investment in the commercial sector has been driven by a range of different investors. These include individuals with cash deposits, syndicates, as well as self-managed super funds (which have become increasingly popular in recent years).
Similar to the residential market, the commercial investment market has been driven by a mix of local and foreign investors.
When it all began
The commercial investment market kicked in at the beginning of 2014 and is now buoyant. The properties are selling on net annual yields from 2.5 per cent to eight per cent.
What has helped to underpin that demand is the banks’ renewed confidence in the commercial investment market. Ever since the GFC began in 2007, the banks have had no appetite for commercial property. At the time, businesses were visibly struggling so banks did not have confidence in lending into the commercial market.
Now that there has been an improvement in the NSW market, things have changed in Sydney and the regions of NSW.
In cities such as Dubbo, Albury and Tamworth, which have a very strong local economy, commercial investment properties are sought after. The yield in these areas is typically 8-10 per cent. The reason being that there are typically fewer buyers. However, many Sydney buyers are now looking to regional NSW cities for a better return, so things may change over time.
However, not all aspects of the commercial market are strong. The office market in Sydney has remained weak in recent times. This is not surprising when you consider how business has changed since the GFC. Whereas businesses previously required 15sqm for their teams to work in, today this has shrunk to 10sqm. In addition, growth in white-collar employment has slowed and many government organisations have moved from the Sydney CBD to the regions.
At REINSW, we believe the strength of the commercial investment market is a good thing. There’s a lot of money looking for a home in property. While the share market is still volatile, commercial property investments can be a stable investment and investors are recognising this.
A lot of these investments are fuelled by foreign investors. This is especially the case in Sydney, where the NSW Government is actively encouraging this group to invest in the property market.
At REINSW, we’re still waiting to see how the market develops, but I think we’ll see prices in the commercial investment market level out.
On the market
The following property recently sold for a significant amount over the reserve. For me, this is a perfect example of the properties being sought after in the commercial investment market and the solid returns they can offer their investors.
Property: 266 Forest Road, Hurstville
Tenant: Hungry Jacks
Building: 400sqm over two levels
Sold for: $6,500,000
Sale price: $6,650,000
Style: Large two-level building complete with ground level retail and lower level staff amenities and storage. Also features access for rear loading and parking from Humphreys Lane.
Location: Ideally situated beside the main entrance to Westfield Shopping Centre and approximately 100m from Hurstville Station.
This article was first published in the September 2014 edition of the REINSW Real Estate Journal.