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Where to find the best opportunities in commercial property

STAFF REPORTER

With interest rates at their lowest levels since the global financial crisis and commercial property yields remaining strong, well-leased and well-located office, retail and industrial assets are expected to continue to be in demand from smaller, private investors. But the pockets of value in the sub-$10 million bracket differ between markets, with Australia’s multi-speed economy creating unique supply and demand dynamics in the cities.

Plunge

Greg Paramor, of listed property investor and fund manager Folkestone, says investors are now willing to take the plunge back into the property, given the premium on offer compared with bank deposits.

“A year and a half ago [in 2011] there was a 2 per cent premium to cash, not a compelling reason [to invest in property]. Now you get 3¼, 3½ maybe 4 per cent on your money compared to 7, 8 or 9 per cent on real estate [as at December 2012] and you think there is a good reason to shift into real estate,” Paramor says.

Across the board

“Property markets are pretty secure at the minute, with yields comfortably back to normal and interest rates low. It bodes well for real estate investment. I think activity will be pretty strong across the board.”

Warren Ebert, the head of Brisbane-based Sentinel Property Group, has been an active buyer of office, industrial and bulky goods assets in the past few years. He says the spread between property yields and debt costs has never been greater.

For buyers with $5 million to $10 million to spend, he says it is hard to go past secondary industrial assets in Queensland, where demand is strong and construction levels low.

Limited supply

“There is very limited supply of new stock, and any new stock coming on is already pre-committed,” he says. “So for tenants out there who need to expand, there is nothing there for them. A well-designed facility in a good location . . . you can buy it at well below replacement.”

Melbourne-based Anthony Wilson, managing director of property syndicator Podco, says office properties in city fringe and suburban locations are in demand, as construction levels remain low.

He says high-yielding property assets with long-term leases will continue to be sought by investors, as the cost of debt remains low.

On the fringe

“If you look at Melbourne, the new CBD supply in Docklands is impacting on the city markets,” Wilson says. “But in the fringe markets, in the inner east and south, vacancy rates are low.”

In the Sydney commercial market, CBD assets with a price tag under $10 million are few and far between and will continue to be sought after in the coming year, says Ben Adler of Savills Capital Transactions. There has also been increasing demand for well-positioned CBD strata assets with several deals in the $1 million to $7 million price bracket in 2012.

“Owner occupiers are the most active purchasers in this asset class, however, due to new super fund laws, decrease in interest rates, etc. We are starting to see a number of investors seek prime-located strata investments with solid lease covenants and longer lease terms in order to safeguard against the short-term leasing market,” he says, noting that these are rare commodities, given the average lease length for strata properties is three years.

Receiver stock

Investors are also starting to see value in fringe markets such as Sydney’s Surry Hills, according to Adler.

CBRE’s associate director of metropolitan investment properties, Tim Grossman, expects the Sydney private investment market to continue to be active, providing there is enough stock. Much of what’s on the market is receiver stock, which has had problems in the past, he says. “Typically there is a reason they are in the position they are,” he says, “and they are being discounted because of whatever problems they might have.”

In Perth, investors are starting to identify opportunity in some of the city’s fringe office markets, says Mark Butler, managing director of Otan Property Funds Management.

Of particular interest are markets neighbouring West Perth, home to many of the state’s small mining companies, which has had one of the country’s tightest vacancy rates for several years.

“West Perth is full but [investors] are moving now into Subiaco, very strongly, and Leederville,” he says. “There’s a bit that’s good quality and it’s well priced.”

Yield compression

Butler also says suburban retail strips, with a few specialty stores and anchored by a supermarket, offer growth opportunities.

“You are going to get some yield compression on those. And that will give you some growth,” he says.

He also expects local and interstate investors to head back into the residential market for assets between $400,000 and $1.1 million, as market conditions in Perth improve, while others remain weak.

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