Commercial property in regional Australia is set to benefit from the changing demographics experienced during Covid, with Queensland likely to be the big winner according to a new report.
The Real Estate Institute of Australia’s (REIA) State of the Industry Report predicts that increased numbers of people moving to regional Australia will see commercial property in those areas outperform in the future.
REIA President Hayden Groves said that after years of investors focusing on capital cities, regional locations will continue to appeal to commercial investors.
“For commercial property investors, there is certainly opportunity to capitalise on these changing population trends and small business activity in regional areas, notwithstanding the current interest rate environment,” Mr Groves said.
According to the report, the regions offer comparative growth opportunities for both rents and yields as interstate migration patterns continue to evolve.
The report found Queensland will likely continue to be the main choice for Australians looking to relocate, which will drive demand for commercial real estate.
Interstate migration patterns are starting to normalise post-Covid, with fewer people leaving Victoria and NSW compared to early in the pandemic. Fewer people are also moving to Queensland.
However, the numbers are still vastly different to pre-Covid levels, and this is having immediate consequences on rental prices in places like Queensland.
Overseas migrants are also following broadly the same migration patterns as they did pre-Covid, with the vast majority settling in NSW and Victoria.
A small uplift has been recorded in South Australia, where 7.3 per cent of migrants settled in compared to an average of 5.8 per cent pre-Covid.
While Western Australia is seeing a smaller share than pre-Covid of overseas migrant settlements.
“On present trends, it looks like Queensland will remain a major beneficiary of interstate migrants and continue to attract roughly 14 per cent of all overseas migrants,” the report said.
“However, the economic environment does play a major role in how people move about. In the immediate aftermath of the GFC, overseas migration plummeted, which impacted all states, however, interstate migration also decreased dramatically.
“While it remains to be seen if these regional migrants intend on making their move permanent, small business data tells us that regional Queensland is a hive of activity now.”
The report said areas that are experiencing rapid population and business growth, but where limited supply is being added, could have both good rental growth and attractive yields versus their capital city counterparts
Industrial property stands out as a clear opportunity for investment, particularly those that can provide automation solutions for their tenants, who in regional areas are likely to be small businesses.
The report also expects Australia to continue to outperform many other developed economies.
Mr Groves said despite a mixed bag of economic headwinds the OECD is forecasting Australia to outperform many other advanced economies, forecasting GDP to grow around 2.5 per cent.
“On the one hand, you have energy prices which will have a major impact on outgoings; but on the other hand, you have an economy performing relatively well and migration programs expanding,” Mr Groves said.
“Energy prices are set to increase by around 56 per cent as international migration resumes for the second year at significant scale, with an anticipated 235,000 people set to call Australia home next financial year.
“All of these changing factors offer a unique set of opportunities and challenges in the run in to 2023 for the commercial real estate sector be it practitioners, investors or occupiers.”
The report said while the risk premium on commercial property is tight, the sector should return to supply/demand rebalance relatively quickly, as supply slows over the next few years and demand strengthens as we move into recovery mode.
Occupancy has been battered in the office sector, although it is likely to be more of a structural change, rather than a permanent shift down in demand.
While energy-efficient buildings with great base building offerings and tenant amenity still offer good long-term value.
The report also found there were other opportunities for commercial investors across automation and technology, supply and future development opportunities as monetary policy normalises and construction pipeline constraint eventually eases.
Mr Groves said Covid had disrupted Australian commercial real estate more so than other sectors of real estate and with that disruption has come opportunity.