Everyone is by now familiar with the daily headlines trumpeting surging home prices, affordability crisis and potential housing “bubble”. Amongst all of this media attention a similar increase in the price of commercial property has by comparison almost escaped notice. But the phenomenon of rapid growth in property prices is by no means confined to the housing markets of Melbourne and Sydney.
Commercial property markets have similarly experienced a period of rapid and consistent price escalation over recent years. Escalating prices in the commercial property sector stem from rental income growth and/or yield compression. The present cycle is being driven by yield compression, often against a background of little or no income growth.
Burgess Rawson’s Raoul Holderhead identified a number of factors influential in this trend including:
Interest rates sitting at their lowest point in fifty years, contributing to the yield spread on direct property investment becoming more attractive;
The low interest rate environment has caused some investors to move from the security of cash and bonds to higher yielding direct property investment;
Property is perceived as offering sound security in uncertain times;
The availability of attractive depreciation benefits which some assets offer can make the income stream particularly tax effective;
The weight of domestic funds from both private and institutional sectors seeking limited opportunities in commercial property markets; and
Australian property markets have experienced an unprecedented inflow of foreign capital encouraged by attractive yields, a sound currency and stable economic and political environment.
The growth in commercial property values is perhaps best illustrated through Burgess Rawson’s successful marketing, on three separate occasions, of the Bunnings hardware in the Victorian regional centre of Warragul. The buyers were a mix of domestic and offshore investors, which is indicative of the present composition of the market in the highly competitive sub $10.0 million price bracket.
Selling agent Raoul Holderhead said “Bunnings Warragul is subject to a Fifteen-year lease term from March 2007, and offers the certainty of annual 2.5% rent increases and an attractive Net lease structure. The property remained unchanged between three successive sale dates, save for application of the fixed rental increases and a reduction in the remaining lease term (WALE). Each of these sales was secured under competitive bidding at a Burgess Rawson Investment Portfolio Auction, surely the best test of market appetite on any particular day”.
The property achieved a healthy value increase of 38.7% in barely more than a three year period, whilst the rental income grew by a much more modest 7.7%. Clearly the majority of the growth can be attributed to a near 2.0% reduction in yield between the first and last transaction dates. “These sales represented outstanding outcomes for each of our vendors” noted Mr Holderhead.
These transactions have not occurred in isolation with commercial markets across the board demonstrating the contracting yield expectations of investment buyers. Some further transactions indicative of the prevailing low yield market environment include: