With the sharp increase in interest rates over the last 15 months, commercial property is going through a phase of adjustments. Hybrid working for office-based workers is still to settle with CBD and suburb retail as well as office sector adjusting to the emerging trends. Buyers are looking for prices to be reset taking into consideration these dynamics with sellers not yet forced to meet the market with a resulting significant decline in sale transactions occurring over the year to date.

In this update we review a snapshot of the wider sub $25M market.

Industrial:

This sector has seen an uptick in demand from tenants seeking to purchase properties to secure their future and control and avoid significant rise in rentals that has become evident over the last couple of years for this asset class.

Australia’s industrial and logistics sector continues to display strength in rental growth and progressively softer yields with the deviance between supply and demand continuing to drive industrial rental growth in many precincts. Capital investment has become more prudent as the current yield decompression cycle continues.

Occupier activity is steadily improving with quarterly gross take-up trending upwards in most precincts. Whilst ongoing interest rate hikes has decreased consumer purchasing power and therefore slowing occupier demand from retailers and ecommerce users, it has not diminished demand from warehouse and logistics users looking to expand.

Investor demand is steadying with transaction volumes hovering around levels recorded over the last six months. Whilst there is some hesitancy from larger institutional capital investors due to more challenging economic conditions, opportunistic investors are still active in the market. Industrial sales however along the eastern seaboard and within capital city markets of Sydney, Melbourne and Brisbane continue to transact with buyer activity within the lower price brackets up to $20-$25M remaining bouyant.

In Sydney, a tenanted industrial facility on 5,715 square metres at Wetherill Park in Sydney’s outer-western suburbs sold to an owner-occupier for $16 million on a 3.31% yield, whilst in Melbourne three brand new adjoining warehouses in a fast-evolving industrial precinct in Melbourne’s south at Cranbourne West sold for $12.5 million at an average square metre rate of $2,622.

Also in Melbourne, a strategic infill site at one of Melbourne’s tightest held northern industrial and logistics precincts, Somerton, has sold for $12.2 million with the property reportedly subject to over 50 enquiries and six official offers from a mix of institutional, private as well as owner occupier buyers. Likewise in Tullamarie a 6,295sqme industrial facility with vacant possession sold for $14.3 million a 51% uplift in the 16 month of ownership. On Melbourne’s south-east bayside, a 5,000 square metre industrial warehouse in Braeside sold for $11.1 million with agents reporting the EOI campaign generated fifty enquiries from both owner-occupiers and investors.

In Brisbane, a private investor has purchased a 3,415 square metre office/warehouse complex on an 8,000 square metre site in Willawong in Brisbane’s south for $12.75 million and BPI (Brisbane) Pty Ltd sold a 4.94hectare vacant industrial redevelopment site in Brendale in Brisbane’s northern suburbs to a local owner-occupier for $17 million.

Office:

Office capitalisation rates in all capitals continue to soften as domestic and international economic uncertainty and the significantly higher cost of capital continues to flow through and more broadly influence the market.

The uncertain domestic and global economic environment will continue to weigh heavily on investor decisions over 2023. Key factors include increased cost of debt and increased scrutiny of loan serviceability. The main metric of inflation, which is beginning to trend downwards, and interest rate movements will continue to be monitored closely by the wider market.

Demand for office space remains subdued, influenced by a weaker domestic economic landscape. Whilst the ‘flight-to-quality’ trend continues to dominate Australia’s commercial office market evidenced by demand for prime A-Grade space remaining strong, this move comes at the expense of the secondary (B, C and D-grade) market where vacancies are rising. Work-from-home and hybrid work practices are forcing businesses to rethink their space requirements and deciding to downsize.

The market has recently seen several high-profile sales of large commercial office offerings in capital cities signalling a re-pricing of CBD office assets as a result of decreasing office demand and a reconfiguration of demand needs, particularly from large corporate clients, brought about by a wider cultural shift in workplace culture and the adoption of more flexible, hybrid work practices.

Smaller-scale commercial office assets in fringe CBD and fringe suburban precincts continue to attract solid buyer interest evidenced by a three-level 2,585 square metre corner office building in Sydney’s Parramatta selling for $18 million on a 4.29% yield.

In Melbourne, a 12-storey B-grade half-empty office building in Queen Street Melbourne sold for $27.5 million and four properties at Ground, Level 1, Level 2 and Level 9 of 420 Collins Street offered with vacant possession sold for $11.21 million with reportedly high levels of interest reflecting strong demand from both owner-occupiers and investors.

In Brisbane, a fully-lease 5-storey A-grade office building in the emerging Hamilton office precinct to Brisbane’s east sold for $18.5 million.

Retail:

Australia’s retail sector has displayed moderately strong fundamentals over the last two years evidenced by resilient consumer demand, however early signs of a tapering of discretionary consumer spending is becoming more evident as cost-of-living pressures increase and the full-effect of the RBA’s rate tightening cycle is fully absorbed.

Consequently, national retail turnover growth is forecast to materially decline over the second half of 2023 as a large group of fixed rate mortgages expire and revert to variable rates and inflation continues to trend down. All retail sub-sectors are recording yield softening with the rising cost of debt and economic uncertainty limiting investor activity.

Retail rents nationally across all sub-sectors remain stable however CBD rents continue to trend down, albeit rents in most capital cities have now rebased or are close to rebasing. Investor appetite for retail assets is concentrated predominantly in the sub-regional sub-sector with less interest and fewer active purchasers in the large-format retail (LFR) and neighbourhood shopping centre sub-sectors.

Demand however for more-affordable, lower entry-price point regional and smaller outer-suburban retail assets remains robust evidenced by the sale of Bathurst Chase Shopping Centre in regional NSW to property investment firm Mintus for $17.5 million on a passing yield of 7.36% and a group of four restaurants in Sydney’s outer-south-west at Campbelltown sold for $9.15 million to a Sydney-based private investor on a yield of 6.22%.

In Melbourne, a Chinese investor purchased the Cole-anchored Village Lakeside Shopping Centre in Pakenham in Melbourne’s south-east for $25 million on a 5.5% yield and a private local investor purchased another 4,000 square metre Coles-anchored small neighbourhood shopping centre focused on non-discretionary shopping needs in Camberwell in the eastern suburbs for $37 million on a 4.42% yield.

In Brisbane, a 1,246 square metre mixed-use medical and retail complex containing 13 tenancies over two floors at Waterford West in Brisbane’s south sold to a private investor for $9.415 million reflecting a yield of 6.09% and a private investor paid $12.1million under the hammer for the IGA Marketplace Ascot in Brisbane’s inner-northern suburbs reflecting a 4.88% yield.

Alternative/Defensive assets:

The alternative property market asset class which includes traditionally defensive asset such as childcare centres, service stations and fast food/convenience retail outlets typically strategically located and very often on long leases to secure national tenants and operators continues to be highly sought after amongst investors.

Investor activity and high enquiry levels at regular commercial portfolio auctions in Sydney, Melbourne and Brisbane by commercial agencies such as Burgess Rawson remains strong with the latest results revealing more than $31 million of commercial assets transacted last month at an average yield of circa 6% with private investors once again favouring essential services assets such as convenience retail, fast food and childcare. Yield compression in asset classes such as childcare have not deterred investors from buying centres evidenced by a private investor purchasing a western Sydney-based centre for $14.85 million on a 4.1% yield, setting a national record.

In Sydney, a 39-place licensed Goodstart Early Learning Centre in Mosman sold for $4.41 million on a record-low yield of just 2.75%. Also in Sydney, five childcare sites in the western suburbs at Rooty Hill, Bankstown, Guildford, Auburn and Toongabbie sold in just 30 days for a total of $14.265 million.

In Melbourne, ASX-listed HealthCo Health Wellness REIT sold a childcare centre at Armadale in Melbourne’s east to an Asia-based private investor for $20.5 million on a 4.6% yield, the biggest such deal in the state.

On the Gold Coast, Centuria Capital Group sold a Robina childcare centre operated by Papilio Early Learning to a private investor for $8.8 million on a 4.7% yield and in south-east Queensland a tranche of six childcare centres at Pimpama, Dakabin, Thornlands, Bribie Island, Worongary and Goodna sold to private investors for a total of $27 million at a yield range of between 4.50% and 5.54%.

In the Service Station space, a 6,999 square metre BP petrol station and McDonald’s outlet at Williams Point in Williamstown North sold while under construction for $7.5 million and a BP fuel station at Wollert in Melbourne’s outer-northern fringe sold in an off-market transaction for $6,756,000 on a 5.16% yield.

Important information

The information contained in this article is gathered from multiple sources believed to be reliable as at 26^th September 2023 and is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. NAB recommends that you seek independent legal, property, financial and taxation advice before acting on any information in this article. ©2023 NAB Private Wealth is a division of National Australia Bank Limited ABN 12 004 044 937 AFSL and Australian Credit Licence 230686.