Commercial Property Continues to Prosper

Commercial Property Continues to Prosper
March 19, 2019 Malcolm Ashby

The commercial and industrial property markets are generally strong along the eastern seaboard of Australia, and steady in the south and west of Australia. This is primarily due to the strength of the underlying economic factors, being:

  • Historically low interest rates – both short and long term
  • Continued population growth – particularly in Sydney and Melbourne
  • Economy that continues to grow– 27 years uninterrupted GDP growth
  • Strong infrastructure investment

So despite the gloomy predictions in the media for the residential market, the commercial and industrial markets continue to engender positivity.

Strong sales activity in the Sydney and Melbourne markets has seen yields continue to compress, with large commercial office buildings seeing average yields between 5% and 6%, while the larger, well located industrial properties in Sydney are showing 5.5%-6%.

In Melbourne, where industrial land is significantly cheaper ($250-$350 per square metre, as opposed to Sydney’s $700-$1,000 per square metre), yields are a little higher at 6% to 7%.

There is significant movement in tenants in both office and industrial space. Larger organisations are tending to relocate their offices to premises that are closer to transport links and there appears to be a conscious move to reduce car parking spaces.

In Melbourne, there has been a relocation of large firms from outer areas to fringe CBD locations like Melbourne’s Richmond. In Sydney, there has been strong movement to Parramatta.

Industrial tenants, by contrast have shown a preference to moving out to larger premises with strong transport linkages, particularly in Melbourne’s west and south east.

Commercial properties in South Australia and Western Australia have seen values stabalise in more recent times, with Perth showing signs of resurgence in the mining sector.

Job advertisements on Seek are showing advertised wage rates trending back to near boom time levels, however investment in new properties remains low.

There is high vacancy rates in Perth with a number of fringe CBD properties being vacant for extended periods. Tenants are able to negotiate extremely favourable terms with long rent free periods. Owners are amenable to this to help achieve higher face rents over longer lease terms.

In Tasmania the initial residential growth has flowed on to major commercial premises in Hobart. There have been some strong recent sales of commercial properties in the CBD area that have good underlying land areas and firm yields.

At the smaller end of the range, investment in commercial and industrial premises remains buoyant. Smaller industrial units have shown strong increases in value, predominantly driven by owner occupiers.

Typically these premises are being purchased by owners who have strong small businesses, and a growing proportion of these transactions for owner occupation are being purchased through Self Managed Super Funds.