- Small investors remain active in sub-$5 million commercial market
- Small retail shops and industrial assets remain popular choices among investors
- Development sites, smaller hotels, service stations and childcare facilities popular
Despite higher interest rates contributing to a slowdown in commercial property sales, smaller investors are still active in the market, particularly for assets under $5 million.
According to Vanessa Rader, Head of Research at Ray White Commercial, there have still been strong transaction volumes across industrial, retail, and office assets at the more affordable end of the market.
After seeing huge transaction volumes in recent years, commercial activity has been slowing down since the Reserve Bank of Australia (RBA) began hiking interest rates.
According to Cushman and Wakefield, Australian commercial real estate recorded $43.6 billion in transactions in 2022, with the office market leading the way at $16.3 billion in volume. The industrial and logistics category followed closely behind with $10.1 billion, and the alternative and specialist markets recorded $9.0 billion. Meanwhile, retail transactions finished the year with $8.2 billion.
However, commercial real estate volumes eased over the year amid economic uncertainty, with $9.1 billion in transactions recorded in Q4 2022.
CBRE is forecasting that the slowdown in real estate investment activity will continue this year, with a mid-single digit decline in transaction volumes for 2023, before a 20% rebound in 2024. While the cost of funding has challenged deal flow, activity is expected to pick-up as interest rates stabilise.
Sub $5 million sales still active
Rader said that both vendors and buyers have been more cautious with their property decision-making, and various investors have exited the market due to the greater difficulty and increased cost of financing.
However, there have still been more than $17 billion in sub $5 million sales during the year to May 2023.
Rader said that small retail shops have proven popular with investors in the past 12 months, with the affordable price point of these properties averaging $1.01 million.
“There has been so much conflicting information about the future of retail, however, this has not deterred investors seeking out suburban shop fronts, with assets transacting $3.7 billion this last year,” said Rader.
Industrial remains popular
According to Rader, industrial freehold and industrial units also continue to be popular choices among investors.
“Industrial has been the favourite investment class to purchase over the last few years. This has continued into 2023, with any smaller freehold assets in strong demand by investors and owner-occupiers.”
Vanessa Rader, Head of Research at Ray White Commercial
“Future potential is a key consideration in this sub $5 million price point.”
She said that industrial units have been popular with ‘mum and dad’ investors and first-timers, together with small business owners looking to shelter from rising rents.
“These small investments were also used as storage units by some buyers, with the growth in the ‘man shed’ phenomenon over the last few years.”
The average sale price of sub $900,000 is an attractive price point, fuelling continued investment across the country.
Office bucks the WFH trend
Despite the negative press about office assets in decline due to the increase in work from home, buyers are seeking out quality office assets, said Rader.
“Again, price point driven with the average sale price $878,000, buyers have been active in NSW and Victoria with an uptick in ACT, Queensland, and WA locations.”
While remote work has caused some concerns around the future of office spaces, Rader believes that buyers are still drawn to quality assets that offer a good value proposition.
This sentiment of ‘flight to quality‘ has also been reflected in recent months, with some companies noting a clear bifurcation of the market along quality lines.
Development sites getting attention
Meanwhile, larger development sites across all zoning have been the next most active asset class, with residential the clear leader and industrial not far behind.
Rader said that buyers are looking to landbank or capitalise on future opportunities, albeit at the right price.
Smaller hotels and motels are also gradually garnering the eye of investors:
“While there are limited opportunities in the sub $5 million price range, we have seen a number of regional assets transact over the last 12 months growing this investment share”
“Older style motels are a favourite of owner-occupier operators and seasoned investors for redevelopment opportunities during a time where domestic travel continues to be at a high rate.”
According to Rader, more specialised properties like service stations and childcare facilities also continued to get investors’ attention because of their long leases and “set and forget” nature. She also noted there was strength in showrooms and regional pubs.
