As the residential investment market slows, traditional residential investors are shifting their focus onto the stronger underlying real estate attributes and superior tenants on offer in commercial property investment. This is according to Simon Staddon of Burgess Rawson.
Burgess Rawson is a full-service Australia-wide agency carrying out sales, valuations, leasing, and managing commercial and residential investment property, and are featured in the latest edition of Your Investment Property magazine.
Has price parity influenced the investor shift?
Simon Staddon explained: “Price-parity, yes, it comes back to the residential median house price very often. If you look in Sydney, the median house price, let’s call it circa over $1 million, but there has been a slowing of the residential market as you just indicated.
“And there’s no question that traditional residential investors are now… We’re seeing a lot of it because we monitor enquiry and everything else in our agency, and there’s a lot of people coming out of residential because they’re not quite sure where it’s going, and the commercial investment market is just kicking along. Low-interest rates still, and it really is business as usual. It’s a very strong commercial investment market at the moment, and that’s exactly the area of the market that we are very much at the coalface of things.”
Are people diversifying their investments?
The shift in real estate dynamics is not always a case of dropping on and picking up another. Many investors are keeping their residential investments, while still dipping into the commercial side of things. Diversifying portfolios can happen both ways.
Simon said: “There’s a logical step… I think if someone has been a traditional residential investor for a number of years – and we’ve seen this in our agency – I think the first logical step is sometimes into an asset class like childcare, because obviously, it brings in elements of residential but is also a commercial asset class in its own right. It’s a very, very popular asset class.
“I look back to, say, 2010/11, yields on childcare investments were around 8% believe it or not in that timeframe. 2017/18 now, they’ve compressed to under 5%. That’s a huge difference, but it’s a very hot sector and it’s a very logical thing for traditional “ressie” investors to come into. It’s obviously not the only asset class, but it’s a stepping stone if that makes sense.”
How does commercial investment differ from residential?
What many residential investors don’t realise is that under the terms of a commercial lease, a tenant can be responsible for paying a number of outgoings, which isn’t the case in residential. These outgoings can include council rates, land tax, and insurance.
With commercial investment, you can get a different type of tenant, for example, a business tenant rather than a residential/family type tenant.
Staddon said: “The advantages obviously are the quality of tenant. We sell a lot of brand-name investments, and obviously, with residential property, you’re dealing with moms and dads or whatever, but with commercial property, you can secure a very good tenant who will pretty much look after everything in terms of outgoings.
“In terms of rental increases, we’ve just been instructed on a property in Darlinghurst, a retail investment, and that has 4% annual increases, which is really a huge advantage because the value of your commercial investment will go up by the increment of 4%. And obviously, as the rent goes up, it is just a question of what yield is and the value of the property. The capital value of the property goes up as well.”
Does an investor have to adjust their mindset to diversify?
Residential and commercial properties are completely different entities, and with this comes a different way of thinking in regards to investment. An investor may find themselves having to think and act differently when diversifying their portfolio.
Simon explained: “I think a residential investor is very location-specific. They have a location-specific mindset. With commercial property, the primary drivers over residential can be such things as an asset class, strength of tenant profile, and the length of the lease. The length of the lease is very, very important. If you get a Coles as a tenant and you have it on a brand-new 15-year lease, it’s set and forget. And that mindset is very different.
“Investors will go in any location. We sell property all over Australia. It’s really a numbers game, and the location is not the primary driver very often. I can give you lots of examples on that on fast foods or whatever where we’re selling Coffs Harbour, a Guzman y Gomez at 4.5%. That’s not based on the location. It’s based on asset class, length of lease, depreciation, etc.”
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