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Cheaper for small businesses to buy commercial property than lease

Raine & Horne has released its second quarter commercial insights, showing the health of the commercial property market in Australia.

A “perfect storm” of supply and demand forces is shaping the commercial property market, making it cheaper for many small businesses to buy rather than lease their premises, a new report shows.

Raine & Horne’s Commercial Insights Q2 2021 shows historically low interest rates and investors chasing strong yields, especially in the thriving industrial property market, is fuelling demand.

In terms of supply, the commercial property market is facing a retraction of stock following the conversion of many former industrial assets to residential properties, coupled with a lack of new industrial developments.

This is creating a significant undersupply of listed properties, which is driving commercial values higher and tightening vacancy rates in many areas.

Industrial assets in high demand

Market conditions are particularly buoyant across the industrial property sector.

The growing number of small and medium enterprises (SMEs) choosing to invest in their own premises, is creating a shortage of industrial properties available for lease.

This is pushing rents higher and leading to vacancy rates at near-zero levels.

Strong buyer interest isn’t limited to Sydney. Regional markets across the country are also faring well, driven by interstate investors, affordability and buoyant local economies, which have experienced low rates of COVID-19.

Raine & Horne Commercial Hervey Bay Principal Graham Cockerill said return on investment was the main market driver. 

Current average yields in Queensland’s Hervey Bay are nine per cent for retail property, and seven per cent for both industrial and office assets. 

“Due to low interest rates, we expect these yields to fall over the course of the remainder of 2021, while owners should see the capital values of their commercial properties improve,” Mr Cockerill said. 

Raine & Horne Commercial Sutherland Shire Director Anthony Bouteris has seen high demand for industrial assets, with buyers spanning “mums and dads, tradies and owner-occupiers from Botany and Alexandria”. 

Across the shire, office property had respectable yields of three to five per cent, while industrial rose by five to six per cent. 

In the industrial market, Mr Bouteris said the availability of stock listed for sale or lease was low. 

“Industrial assets are very tightly held at the moment. Buyer demand for industrial is the highest it has been in a very long time and was not affected at all during COVID-19,” he said. 

Office space rebounds

Agents have reported a rebound in the office market as businesses transition to a blend of flexible work arrangements that include telecommuting.

Raine & Horne Group Executive Chairman Angus Raine said regional locations in particular are seeing a rapid return to normal market conditions.

“We are seeing the ideal blend of conditions in the commercial property market right now,” Mr Raine said.

“Interest rates are at historic lows, the economy is rebounding sharply, and investors – including self-managed super funds, are seeking assets with the potential to deliver stable yields and steady long-term capital growth.

“It all adds up to make commercial property very attractive, and in the current market, industrial assets are the jewel in the crown.

“The key challenge buyers face at present is a shortage of listed stock. This makes now the ideal time to sell a commercial property for those investors seeking alternative opportunities.”

Raine & Horne Commercial Brunswick Managing Director Tim Frlan said yields in inner Melbourne suburbs were around five to six per cent for retail assets, depending on the quality of the tenant. 

His area also showed five per cent yields in industrial properties and around 6.5 per cent for office space. 

Mr Frlan said owner-occupiers were “saying goodbye to the landlord and buying their own premises”. 

Other industries are benefiting the commercial property sector

Raine& Horne Commercial Western Australia Director Anthony Vulinovich said a pickup in mining and residential activities have been key drivers for the WA commercial market. 

In Perth, commercial properties across the spectrum, including retail, industrial and office, are delivering average yields of six per cent. 

Raine & Horne Commercial Brisbane Southside Director Joseph Grasso said the volatility of other investment options were driving people to look into real estate.

“Money in the bank is generating returns of 0.3 to 0.4 per cent, if you’re lucky, on a term deposit over 12 months,” he said.

“In comparison, the returns that commercial property provide are extremely attractive, while investing in the stock market is still a volatile ride.”

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