Raine & Horne Commercial has released the Autumn 2018 edition of its Commercial Insights.
The report highlights the factors driving commercial property in Sydney’s CBD: low interest rates and a growing number of self-managed superannuation funds (SMSF) chasing high yields.
Low interest rates – owning is now cheaper than leasing
Executive chairman of Raine & Horne Group Angus Raine said: “Continued record low interest rates are making it more cost-effective for many small-to-medium-sized enterprises (SME) in Sydney’s CBD to own rather than lease their premises. The commercial asset is often held within the proprietor’s SMSF providing a win-win for all parties – security of tenure for the business and a strong level of control over super fund returns.”
SMSF flee shares to commercial property
Mr Raine noted: “A volatile share market, low returns on cash and the combination of high prices and low yields for residential property are seeing SMSF turn to commercial real estate in droves.
“This is further supported by the escalation in SMSF numbers, with an average of 34,000 new SMSF being established each year. Commercial property is increasingly recognised as a highly desirable asset delivering strong capital growth, healthy yields, long term leases and low maintenance costs, all of which is extremely appealing to SMSF trustees,” adds Mr Raine.
Co-principal of Raine & Horne Commercial Sydney CBD Christian Cirillo is expecting commercial values in Sydney’s CBD to rise by as much as 10% over the year ahead.
At present retail yields are between 3.75-4.5%, though Mr Cirillo believes this yield will rise: “Confidence is down in this sector due to the Lowy family’s move to sell off Westfield. With this said, suburban shopping centres and neighbourhood shopping strips will remain strong till end of year.”
Industrial assets are recording yields of 5.5-6.0% and this is expected to sharpen due to stock withdrawal in fringe markets and a lack of new supply.
Mr Cirillo noted: “Demand is historically high for strata at present.” Across the office market, yields range from 4.5% to 5.75% depending on whether the asset is a premium or B-grade asset, though yields are expected to come off.
“We see yields on office assets increasing as demand is anticipated to remain strong until the end of the year. However, foreign investment is tipped to slow according to reports from our Asia Pacific partners, in Hong Kong, Singapore and China, and policy change in China is starting to have impact on enquiry rates,” explained Mr Cirillo.
Overall the CBD market is characterised by historically low interest rates and high rents, which are pushing owner occupiers to buy their premises, often using tax-effective vehicles such as self-managed super funds.
Vacancy rates vary from 3.0% for industrial property to 4.6% for office assets, and in this climate, Mr Cirillo regards industrial and office strata as being the pick of the crop.