Record low bond rates keep the suburbs hot for commercial

The Savills Blog

Record low bond rates keep the suburbs hot for commercial

There has been a lot of talk lately about the state of falling yields across non-residential property in many metropolitan markets in the nation’s major capitals.

However, it is important to look at this in comparison to comparable investment options. 

Last month, Australian 10 year bond yields fell to record low levels on the back of rising uncertainties about global growth forecasts and growing geopolitical tensions. 

Not only is the cost of borrowing significantly lower, but the relative value story is now even more pronounced. Whilst metropolitan freestanding commercial buildings traded at equated market yields of between 3.50 percent and 5.00 percent, long-term bond yields were recorded at 1.76 percent. Taking a midpoint of 4.25 percent, this means that the standard metropolitan commercial property is trading at a premium of nearly 250 basis points (to the 10 year bond rate).

Compared to the highly sought after office sector, where spreads are closer to 300 basis points, it is clear that metropolitan property remains an attractive investment option, particularly for smaller investors. 

To invest in the office sector, you are looking at significantly larger dollar amounts to be invested, whereas in metropolitan markets, you have less money, but still with strong lease covenants and in some cases, comparable capital values to the secondary office values.

A slowdown in residential property has also had a compounding effect on the level of investor interest in non-residential assets in these metropolitan markets.

We are also seeing a slowdown in the residential sector having a positive impact on metropolitan markets in Sydney and Melbourne. Whereas mum and dad investors and smaller SMSFs who were heavily investing in residential property two years ago, are now on the lookout for more attractive investment options that have higher yields. 

The demand for smaller non-residential assets in metropolitan areas in and around Sydney is being amplified not only by smaller domestic investors diverting money away from the residential property sector (where yields are close to 3 percent), but growing numbers of Hong Kong and Chinese based private investors looking to acquire Australian assets. 

We have also seen a prominent increase in the number of Chinese private investors over the past 6-9 months as FDI restrictions were eased somewhat in mid-2018.

Examples of such income producing assets include 626 Pittwater Rd, Brookvale, a premium freehold retail investment on a 2,175sq m site which sold for circa $8m and 14/360 New Canterbury Road, Dulwich Hill, a ground floor strata retail space occupied by Tyre Power and two mechanical workshops comprising approx. 453sq m and a circa 7 percent return net potential. 

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