After a tough period over 2022 and 2023, the commercial property market can look ahead to consolidation and the prospect of a recovery emerging in 2024, according to Knight Frank.
Knight Frank Chief Economist, Ben Burston, said the sustained pressure of higher rates has naturally put pressure on asset values and this is still playing out to varying degrees. “Part of the uncertainty has been a disconnect between formal valuation metrics and market sentiment,” Mr Burston said. “However, with more deal evidence now coming through and formal valuations likely to be adjusted further in the December cycle, we expect the gap between sentiment and formal valuations to erode substantially over the next six months so that by mid-2024 the picture will be clearer for buyers and sellers alike, helping to restore confidence and liquidity.” Mr Burston said that while reductions in asset value are never welcome, the flipside is the re-emergence of value looking forward. “Higher yields act to reset the market and provide a more attractive entry point for investors, generating the prospect of higher returns,” he said. “This is clearly illustrated when we assess historic market cycles and the performance achieved after pricing is reset in the aftermath of interest rate hiking cycles.” He said the period immediately after the conclusion of previous rate hike cycles ending in 1994, 2000 and 2010, was in each case a very attractive time to buy, achieving above-average returns over the following five years. “This is not to say that history will repeat, and investors cannot take for granted that interest rates will fall exactly as anticipated,” he said. “But careful asset selection will maximise the chances of strong performance whether it is achieved through income growth or boosted by a return to yield compression as interest rates revert in 2024-26.” Record low vacancy rates across the industrial property sector will continue to put upward pressure on rents, according to a new CBRE report.
The CBRE report said that industrial rents are expected to rise by more than 5 per cent next year, with Sydney experiencing a spike of more than 11 per cent. Across Sydney, industrial rents rose 38 per cent this year to $200 per square metre with the vacancy rate falling to just 0.2 per cent. CBRE’s head of Industrial and Logistics Research Australia, Sass J-Baleh, said about 4.6 million square metres of warehousing is due to be built over the next two years, with half already pre-committed. “We expect that even if demand weakens significantly in 2023, there is still not enough supply to satisfy space requirements from major occupiers that are setting up their activities and supply chains for the long-term servicing of the Australian population,” Sass J-Baleh said. Real estate around the world is expected to outperform both bonds and shares over the next five years, according to a new report from Oxford Economics.
Between 2022–2026, Oxford Economics have predicted total returns for real estate and real estate investment trusts (REITs) to average 6.5 to 7 per cent per annum. This is significantly higher than bonds and equities, which are expected to return just 0.7 per cent and 2.5 per cent per annum, respectively. Oxford Economics expects interest rates to remain at low levels in the coming years, which will help underpin real estate prices and drive economic growth. Prime industrial rents surged by double digits in most capital city markets in 2021 as tenants were pushed to compete for the small amount of available space on the market. According to JLL, the highest prime effective rental increases occurred in Perth (up 14.6 per cent), Melbourne (14 per cent) and Adelaide (13 per cent) over 2021. In the secondary market, effective rents rose 16 per cent in Brisbane and Melbourne and 10 per cent in Sydney. Around the country, a record 4.4 million square metres of warehouse space was taken up in 2021. This is a 52 per cent rise on the 2.9 million square metres taken up in 2020. The data from JLL shows that prime industrial rents increased by more than 10 per cent in most capital city markets, fuelled by the acceleration of online retailing and supply chain disruptions. JLL believe the completion of 1.3 million square metres of new logistics facilities in the next six months will ease pressure on companies needing warehouse space and create a more normalised rental market. Two-thirds of this new supply is already accounted for in leasing pre-commitments. Fourth-quarter 2021 figures from JLL show 877,200 square metres of space was leased over the last three months of the year. The majority of this activity was in Melbourne (39 per cent) and Sydney (33 per cent). Last year, JLL says 1.47 million square metres of new space was developed nationally, which was in line with the 10-year annual average. The full-year gross take-up total (4.4 million square metres) was 82 per cent higher than the long-term annual average. JLL still expects above-average growth in the major markets in 2022 with many owner-occupiers requiring immediate access to more space. Most Australians are familiar with investing in real estate and understand the value that a property portfolio can create over time.
However, few property investors venture outside the world of residential property and consider commercial property. While commercial property is a little more difficult to understand than residential, it offers several significant advantages for investors. Higher Yields Most commercial properties have far higher yields than residential properties. It’s not uncommon to see 7-10% yields on commercial properties, which is something that few residential properties can generate. The benefit of high yields is that your asset is contributing to your cash flow every month. Most residential properties are negatively geared investments. Lower Costs Generally, the tenant of a commercial property pays all the outgoing costs associated with the property. That includes maintenance, rates and any strata fees. That means that the rent you receive each month is net of costs and the only real expense that you need to consider is property management fees. All leases are different, so it is important to get the lease reviewed prior to purchasing a commercial property. Loyal Tenants One of the big appeals of commercial properties is that they have long-term leases. It’s not uncommon to see commercial properties leased out to the same tenant for many decades. The reason for this is simple; it is the place of business, and the location is often a vital component of a business. However, the flip side of a long lease is that it can take longer to attract a new tenant in the event the business decides to end the lease. Steady Growth Commercial properties are priced a little differently from residential properties, in that the price is based on a multiple of the lease price. This can make commercial properties a little harder to understand for many new investors. The important thing to understand is that lease increases are generally incorporated into the lease. What this means is that each year the lease will increase in line with either inflation or the broader market. Capital Growth Potential Many people believe residential property is superior to commercial because of the ability to improve a property and add value to it. However, this is equally true of commercial property. As mentioned, the value of the property is tied to how much that property leases for. Anything you’re able to do to increase that lease will mean a higher property value. Things like renovations and subdivisions are quite feasible with commercial properties. Ultimately, whether to invest in commercial or residential isn’t mutually exclusive. A balanced property portfolio should contain a combination of both residential and commercial, and the mix will depend on where you are in your investment journey and what your financial goals are. When you purchase a property with finance, the lender will typically order a bank valuation to help them ascertain the loan to value ratio (LVR) of your home loan. For new home buyers, this might be something that you’ve never thought about before, but the outcome of the bank valuation could have big implications for your home loan. How does a bank valuation work? When you purchase a property that is subject to finance, the bank will order a valuation of the property through an independent valuer. The independent valuer will use a certain method to estimate the true value of the property. A valuer could use a desktop valuation, where they estimate the property’s value based on comparable sales and never visit the actual property. Alternatively, they would do what is known as a kerbside valuation, where they will attend the property and look at it from the exterior to do their valuation. The most common form of valuation is the full valuation, which involves the valuer attending the property and looking through it. They then formulate their valuation based on comparable sales of the other properties. When the bank has the independent valuation, they use this figure to calculate the borrower’s LVR. How does the bank valuation impact borrowing? When applying for a loan with a lender, a bank will normally want to see the borrower has a 20% deposit. This gives them a level of security in the event of a property price fall, or if the borrower defaults on their loan. Borrowers can obtain higher LVR loans, however, they normally come with Lenders Mortgage Insurance (LMI). There are also other programs in place such as the FHLDS or specialist loans (like guarantor loans) that can help first homebuyers who need to take out higher LVR loans. If a bank valuation comes in lower than the price you paid for a property, then you could find yourself in a situation where you have to make up the difference to ensure you are keeping within the LVR required by the lender. That could mean needing a higher deposit or looking at other options such as paying Lenders Mortgage Insurance (LMI). Both of which could cost tens of thousands of dollars. See your home loan options in less than 5 minutes The holiday period is normally a time when people spend more hours at home and some start looking around for a new car. If you’re looking at a loan to purchase a new or second-hand car, it’s important to consider the best way to finance it. The most common ways to buy a car is with cash, or with the assistance of a loan. Which will likely either be a car loan or a personal loan.
Personal Loan Traditionally, personal loans have been used for things like weddings or holidays. However, it is possible to use the funds to purchase a car. The great thing about using a personal loan to buy a car is that it can be faster to obtain. You then have the flexibility to spend the funds from the personal loan as you see fit. However, this might cost you in the long run. A personal loan is typically, unsecured debt. This means that there is nothing backing the loan other than your ability to pay it off with your income. From a lender’s perspective, this is a far riskier type of loan, as there is no collateral in place, in the event that you lose your job and are unable to make your regular repayments. Because of the additional risk, a personal loan will normally attract a higher interest rate which will then mean you’re going to pay more in interest over the life of the loan. Given that a personal loan is more flexible, you can use the balance for things aside from a car, however, this results in more debt that you’ll need to pay off. Car Loan When you take out a car loan it will typically be secured by the car itself. This gives the lender a degree of certainty around the loan. Because of this, you will likely be paying a lower interest rate than you would with a personal loan. However, the process might take a little longer as there will likely be some requirements from the lender around what type of car you’re able to purchase. The other consideration with a car loan is where you get it from. These days many people look to get finance through the dealer. While this might be the easiest option, it will likely not be the best deal to suit your needs. Dealer finance is another way a dealership can increase their profits and they are not working with multiple lenders to find the best deal. If you are looking to take out a car loan, it’s best to speak with a broker in advance and gain a pre-approval. You’ll then know that you’re getting the best option available to you and also what your budget is going to be before you start the search for a new car. See your vehicle finance options in less than 5 minutes Leading Australian valuer Knight Frank believes the sharp growth we’ve seen in industrial assets is set to continue in 2022.
Industrial assets have seen growth of around 15% over the course of 2021 and Knight Frank believes this is a trend that can continue for years to come. Ben Burston, chief economist at Knight Frank Australia, forecasts capital growth at 6% in 2022, as well as a rent rise of 6% in Melbourne, 5% in Sydney, 4% in Brisbane and 3% in Adelaide. Mr Burston suggests the recent growth we’ve seen in industrial assets has come about from investors being prepared to pay more for the same streams of income. He believes this is going to change with price growth likely to come from tighter supply and upward pressure on leases, with demand starting to drive up rents. According to Mr Burston, leasing take-up volumes are 31% above their long-run average on the east coast, pre-leasing activity for new buildings grew by 11% in the year to October 2021 and demand from large users for industrial real estate is likely to exceed supply in 2022. Knight Frank also notes, that there is likely to be an increasing shift towards local manufacturing on the back of the ongoing supply chain issues faced throughout the past 2 years. Mr Burston also believes the office market is set for a turnaround in 2022 after a long period of high vacancy rates. He says that pent-up demand for office space will boost absorption rates and drive market recovery, with the flight to quality indicating that premium and upper A-grade space will be at the forefront of the resurgence in demand. Many businesses that require office space have been waiting for conditions to improve and with the opening of international borders and lockdowns likely to have ended, there will be a push for companies to upgrade their space and return to their respective CBDs. See your home loan options in less than 5 minutes Despite a tough year for many businesses, Australia recorded a record level of foreign investment in commercial property.
According to analysis from CBRE, 2021 saw $16.6 billion in office, retail, industrial and hotel assets changing hands, outstripping the previous record high level of $15.5 billion achieved in 2015. CBRE notes that while many experts predicted closed international borders would hinder international investment in commercial property, the opposite turned out to be true. This is due to many international investors partnering with local fund managers to identify commercial property investment opportunities. In terms of which countries are most actively investing in Australian commercial property assets, North America accounted for the highest share at 39% of all funds invested. North America has been the number one country looking to invest in Australian commercial real estate over the past five years. This year’s level of investment from North America was up sharply from pre-pandemic levels. In second place was Singapore, which contributed 35% of this year's activity, also up on the pre-pandemic average. According to CBRE, some of the major transactions this year involving foreign investors include the $925 million sale of a 50% stake in Grosvenor Place to Blackstone, the $3.8 billion sale of the Milestone industrial portfolio to a partnership between GIC and ESR Australia, the $538.2 million sale of a half stake in Sydney's Queen Victoria Building, The Strand Arcade and The Galeries to a Link REIT/EG Funds partnership and the $315 million of the Sofitel Wentworth Sydney hotel to KKR, Futuro Capital and Marprop. Looking at the different sectors and it has once again been Industrial & Logistics that were the most invested asset class with 44% of total sales. The office sector was closely followed in second place with 43% of total sales. Despite having a tough two years, the retail sector is expected to see renewed interest in 2022 with the reopening of international and state borders and the end of many other restrictions. CBRE expects Australia to continue to see strong international capital inflows into commercial property market next year, with the market being viewed as an attractive proposition given the available returns and the relative strength of the economy compared to parts of Asia, North America, and Europe. See your home loan options in less than 5 minutes As we know, all borrowers have different circumstances and that’s why there is never a one size fits all approach when it comes to lending. For the majority of full-time employees with a good credit history, you will likely have a range of options and be able to look at a regular home loan. To access a regular home loan, you might only need three months of payslips or two years of tax returns. Generally speaking, regular home loans are a lot more stringent and that’s why we see some regular home loans with very low interest rates. Unfortunately, for the self-employed and business owners, it’s not always possible to present two years of tax returns or payslips. For these types of borrowers, there are other avenues to getting finance for a home, one of which is by providing alternative documents (alt-docs). Lenders that offer alt-doc loans will normally require three months’ worth of personal bank statements and six months’ worth of business activity and business bank statements, or potentially even an accountant’s declaration. Given the borrowers’ income is not as black and white as a PAYG employee, interest rates will normally be higher, while there might also be higher loan application fees and setup costs. It is important to note that just because you might be self-employed or a business owner, you don’t automatically need to go for an alt-doc loan. If you’re able to produce two years of tax returns and have a good credit history, then you should be able to qualify for a regular home loan at lower interest rates. However, if your business has recently seen a large increase in revenue and you want to access a larger loan, then it might be worth looking at an alt-doc loan. Similarly, if you’ve had credit issues in the past that you’ve been able to turn around, then an alt-doc loan might work for you. There are also a few myths out there, surrounding alt-doc loans. The main one is that you can get a loan with no documentation at all. Those days are long gone and you will need to be able to prove that you have the means to service the repayments. The second myth is that the big banks don’t take on these types of loans. In many instances, the major banks are able to look at lending to people without the full documentation, given they have the size and diversity to handle different amounts of risk. Once again, the key is to talk to a mortgage broker who can quickly understand your personal circumstances and match you with the right solution for your needs. See your home loan options in less than 5 minutes In the current low interest rate environment, there are a lot of attractive offers for car finance, particularly coming from dealers.
In some cases, you can even find dealers offering 0% finance. While that might look good on the surface, it’s important to understand that the low interest rate might very well come with some additional costs that you hadn’t anticipated. Here are a few things you need to consider before taking on such a low interest rate. The Car’s Price If you’re getting a deal with 0% interest, it’s possible that you will have to pay more for the car itself. It’s highly unlikely that you’re going to be able to negotiate on the price of the car, and you could even pay far more than you need to. Trade-In Value of Your Old Car If you are looking to trade in your old car, you might not get the best possible price from a dealer if you require a lower interest rate on your car loan. There’s generally a spread that a dealer must make on the purchase of a second-hand car, and that could mean you get a lower price and/or you pay more for your new car. Higher Deposit In many instances, it’s possible to get a car loan and pay little or no deposit. This is unlikely if you are getting a very low interest rate as there is some risk to the lender and dealer. Finance is a trade-off at times, and you will need to provide something more if you need a lower interest rate. Shorter Loan Terms Generally speaking, low interest rates or even introductory offers are only for short set periods of time. While it might be possible to get a standard car loan over seven years, if you’re getting a low interest rate, it might be for only two or three years. If you have a shorter term, then a low interest rate might not make that much sense, because your overall payments will be higher. Fees Sometimes, these type of interest-rate offers come with other fees and charges that soon add up. It’s important to look at the total cost of the car, the finance and the repayments over the lifetime of the loan; not just how much your interest rate is in comparison to others as it does not always tell the full story. Lack of Choice In most instances, low interest rate offers are limited to select vehicles within the dealership. While this might not be an issue, if you are in the market specifically for a certain type of car, you might not find what you want. It is far better to have a finance broker look at your personal situation and find a loan that suits you, rather than focusing on getting the lowest interest rate. Often, the interest rate itself is the least important part of getting finance, even though it is the most talked about. See your vehicle finance options in less than 5 minutes Commercial real estate is attractive to investors for several reasons, and it’s normally the high yields on offer in comparison to residential property that are particularly appealing.
However, commercial property comes with an added advantage in that the tenant generally pays many of the outgoing costs. This can be a significant amount of money and can make an investment in commercial property even more attractive for those investors in search of cash flow. Understanding net vs gross yield Gross yield is the rental income you receive before taking into account the expenses. Net yield is your income after expenses. When you purchase a residential property and rent it out as an investment, as the owner, you’re obligated to pay many of the ongoing costs of the property. This can have a significant impact on your rental yield. These costs include things such as the council rates, strata fees, maintenance and repairs, gardening, insurance, property management fees and water costs. While you have an attractive gross yield of 5%, when you factor in the expenses that you’re paying, your net yield might be only half that. When we look at commercial property and the fact that the tenant is paying many of the outgoing costs, your net yield might be very close to your 5% gross yield. It’s important to note that every commercial tenancy agreement is a little different, and what the tenant is required to pay will be different in most circumstances. The other advantage of commercial property from a yield perspective is that it is normally far greater than its residential counterpart. It’s not uncommon for commercial yields to be well above 7% or even 10% at times, and with the tenant paying outgoings, this is very appealing. For an investor in search of cash flow, it can be an attractive proposition. When looking at the high net yields on offer in commercial property, it is also important to factor in periods of vacancy. Generally, when you have a residential property, it’s quick and easy to find a new tenant to take over. Commercial properties can be harder to find tenants for, as it is businesses that take up the space. With commercial properties, the lease agreements are normally for a lot longer; there are many cases where businesses stay in the same building for decades. See your home loan options in less than 5 minutes A commercial property is simply a premises in which business takes place. Many investors may have never considered investing in commercial property, purely because they may not fully understand it.
Most people would set foot in a commercial property almost every single day of their life. From their office building to the local supermarket, service station and even day care centre. Generally, commercial properties fall into specific categories, based on what they are used for. Retail Whenever you go to a restaurant, café, or go shopping at a boutique or shopping centre – you’re stepping into a retail property. Retail is normally located in popular areas where there is plenty of foot traffic, as the types of businesses that own and lease these locations need direct access to customers. Generally speaking, retail properties are more expensive and have lower yields than other types of commercial properties. That’s often due to the nature of the locations they are in. These are already popular areas with great amenities, and the land value is high for both residential and commercial properties. These properties can be quick to lease out. However, there are some risks as businesses such as restaurants can turnover regularly. The great thing about retail businesses like restaurants and cafés is that they are often synonymous with a certain location. That means that if a business is successful, they will potentially stay there for a very long time. Office If you go to work in an office, then the odds are that your business leases that building. However, in some circumstances they might own it. Offices can vary greatly from the premium high-rise locations that you might see in a CBD, all the way out to small office blocks in the outer suburbs that might be used by a small accounting firm or lawyer. Offices can therefore be priced very differently depending on where they are located. One consideration with office space is that businesses might leave if they outgrow the space, as the types of businesses that lease offices don’t always rely on a location. Industrial Industrial property encompasses different types of spaces such as warehouses or manufacturing factories. Typically, industrial properties are not in premium locations and are therefore priced a little lower than other types of commercial properties. This also means yields can be higher at times. Some industrial properties can be very appealing as tenants stay for long periods of time. Conversely, properties like warehouses are simply renting out floor space and not generally fixed in that location. In recent years, warehouses have been in high demand as many businesses move online and need additional space for storage. Specialist Properties Some commercial properties are considered more specialised and don’t fit into one of the above categories. The most common specialised properties are places like services stations and childcare centres. While these types of properties can be attractive, they also come with some risk. Specialist properties typically only attract a single type of tenant – one who operates those types of business – whereas other properties such as office, retail and industrial can be used for a wide range of purposes across different businesses. See your loan options in less than 5 minutes |
EDITOrCategories
All
Archives
December 2023
|