At a time when the residential property space is running red hot, the commercial property market is also coming back to life from the pandemic-driven slowdown on the back of strong investors’ trust and interest.
The COVID-19 pandemic jolted the commercial property market in 2020, reducing the transaction volumes to almost half from a year earlier. The market primarily took a break on transactions between March and July 2020, when much of Australia was in lockdown. However, the gradual easing of coronavirus restrictions across parts of the country helped the commercial property market stand back on its feet steadily.
Latest statistics from the commercial agency JLL suggest that commercial real estate transactions surpassed $5 billion in the first quarter of 2021, observing a Year-on-Year rise of 60 per cent. The biggest uptick in commercial real estate transactions occurred in the thriving industrial property sector and, ironically, in retail property. The transactions grew as yield-hungry investors sought shelter in brick-and-mortar real estate.
Is retail real estate out of the woods?
Retail real estate was among the most prominent commercial washouts of the coronavirus pandemic, thanks to stringent lockdown restrictions, shutting down of businesses and soaring income crunch. Besides, digitisation trends also encouraged more of an e-commerce setup.
Despite these significant headwinds, investors’ confidence appears to be returning in the brick-and-mortar retail. Some analysts are even anticipating a return of the retail property sector to pre-pandemic levels by the end of 2021.
Recent research from Real Capital Analytics revealed that the retail real estate outperformed in terms of transaction value in the first quarter of 2021, surging by 26 per cent Year-on-Year to $1.7 billion. Australia’s robust economic fundamentals also deserve some credit for reviving investors’ interest in the hard-hit sector.
However, one cannot neglect that continuing upward trend in the online penetration rate remains a major threat to the retail real estate segment. Thus, the current scenario calls for a creation of holistic experiences by retailers in brick-and-mortar stores that attract people to visit them. Creation of destinations that enlightens individuals’ mood while allowing them to shop for their desired products can help these retailers regain consumer footfall and demand in the months ahead.
Moreover, omni-channel retailers with solid online and brick-and-mortar options appear to be well-positioned to adapt to the ongoing structural changes in consumer behaviour.
Why are foreign investors regaining trust in commercial property market?
A recently released data from Real Capital Analytics showed that the foreign investment almost doubled in the Australian commercial property during the first quarter of 2021 relative to the same period in 2020. The offshore investment stood at $2.4 billion in March 2021 quarter, as against $1.3 billion in the March quarter last year.
The attractiveness of Australia’s commercial property and the nation’s effective handling of the coronavirus crisis appear to be restoring offshore investors’ trust in the domestic market. Besides, Australia’s well-recognised position as a transparent and safe investment market backed by a robust underlying economy seems to be making its commercial property more attractive to foreign investors.
In addition to these factors, the record low interest rate prevailing in Australia has made the cost of debt appealing, offering a natural hedge for overseas investors. As the nation’s economy continues to recover from the pandemic, foreign investors’ interest is expected to improve in commercial real estate over the months ahead.
The increased demand from foreign investors may deliver a significant push to the nation’s construction activity by allowing domestic developers branch out their activities. However, the greater foreign presence can also potentially add to the sensitivity of capital values to variations in overseas economic conditions.
Are you seeking exposure to commercial property?
At a time when the commercial property market is regaining momentum in Australia, investors may look up to this lucrative space to park their money and potentially earn a decent return.
In fact, it is highly likely that investors, who are superannuation fund members, already hold a stake in the nation’s commercial property. This is because a huge amount of superannuation money is parked in the Australian property sector.
It is imperative for investors seeking exposure to commercial property to have an in-depth understanding of the complex market factors at work, property management options, unique financing requirements and leasing arrangements. A thorough understanding of these factors can provide a reliable basis to investors for their journey in commercial investment property space.
Moreover, the type of commercial property (office spaces, retail outlets, industrial units, etc.) and its location can make a huge difference between a high and low yielding investment. It is worth understanding that not every type of asset class or commercial property provides similar returns or yield.
At the same time, both rental income and asset price appreciation are heavily reliant on the location chosen by an investor. Thus, it is important for investors to invest in a well-established location, which has good access to public transport, includes necessary infrastructural facilities and has low vacancy rates. Properties with alluring interiors and exteriors, close proximity to public places and ample parking space usually retain tenants for a longer time and fetch higher rental rates.
Looking ahead, factors such as the potential return of employees in office spaces, the gradual reopening of economies and acceleration in vaccine rollout are expected to chart out the growth trajectory of the commercial property market in the near-to-mid-term. Investors can prepare themselves for the opportunities that the commercial property market will probably unfold as it moves ahead.
Kunal Sawhney is the founder and CEO of Kalkine. An accomplished financial professional, he has extensive expertise in equity markets and adopts quantitative and qualitative stock selection practices.