Despite rising interest rates and slowing growth in 2022, commercial property has continued to perform strongly over a long period of time according to an expert.
Ray White Commercial Head of Research Vanessa Rader said after a two-year period of high sales volumes and compressed yields, capital growth had slowed down in the commercial sector.
“Those buyers who looked to diversify their portfolio with the expectation of continued strong capital growth may be feeling the pinch now interest rates have risen to their highest rate in nine years, while those who are content with steady income returns, in the hope of longer term gains, are well placed to ride this wave of volatility, which historically commercial property has moved in,” Ms Rader said.
Ms Rader said the industrial asset class had been the clear winner during the COVID-19 era.
“Rising needs for logistic and distribution space, as well as emerging small local businesses requiring accommodation, has ensured vacancies remain low and rents moved upward,” she said.
“Buyers were actively looking to invest into industrial assets, from first-time buyers through to experienced groups, with many moving towards secondary assets in the quest to secure an industrial property.
“As a result, we saw annual total returns peak at 30.2 per cent in December 2021, a rate well in excess of any previous highs for this market.”
According to Ms Rader, while the mismatch in supply and demand will ensure income growth continues for industrial property, but the growing interest rates will put a cap on acceptable yields for industrial property in the short-term.
“Industrial has proved to be an outstanding performer and has moved from what was considered as a secondary asset class to a premium one given the changing way in which our community interacts with industrial property,” she said.
“Total returns over the last five years have hit 15.6 per cent per annum, and 14 per cent per annum over the past 10 years, highlighting the longer term attractiveness of this asset class.
“Considering the downturn during the GFC, total returns, even over a 20-year horizon, still achieved 12 per cent annually, emphasising the quality longer term opportunity on offer for industrial assets.”
Ms Rader said the office market was one of the hardest hit during the pandemic.
“The move to work from home saw many businesses reconsider their accommodation needs, either relocating, reducing, or vacating their office premises,” she said.
“As a result, office vacancies across the country have shown an increase, putting pressure on rents and capital values.
“Despite the change in occupancy and returns, the increased demand to purchase commercial properties saw some buyers move up the risk curve and consider office assets despite uncertain market fundamentals.
“This resulted in yield compression and capital appreciation despite the ongoing reduction in income return.
“As we enter this phase of increased financing costs, the spotlight has shone on this mismatch and reductions in capital returns have started to emerge.
Looking across the longer term, the office market has seen much volatility moving in response to economic shocks impacting capital and total returns Ms Rader said.
“While this may result in some short-term pain for some investors, the quality returns, which this asset class has enjoyed over the longer term cannot be understated; over the past 10 years returning 10.8 per cent per annum and, looking back even further to include the GFC period, annual 20-year returns have also eclipsed 10 per cent.”
Ms Rader said it had been a hard few years for retail but the reinvention of many retail centres and strip shops over the past few years has helped.
“While this market has endured the greatest volatility of the major commercial markets, returns continue to be positive and investment demand up, albeit at the right price,” she said.
“Over the past 10 years retail property has been under the microscope and, during the last few years, not enjoyed the same level of investment demand as other commercial real estate.
“Despite this, total returns still averaged six per cent per annum, while over the longer term (20 years) total returns achieved nine per cent annually, proving commercial assets are a long term investment play.”