Publication: Switzer Daily
Sydney, 10 January 2016
There is certainly strong long-term relationships between long-term interest rates and real estate capitalisation rates, but there are other, more specific market-based factors at play, not the least of which is supply and demand. High institutional demand, for example, in the face of limited supply plays a very significant role, even in a rising interest rate environment, and this is what we have seen to some extent supporting commercial real estate in the major markets of Australia as well.
The bottom line is that the right commercial property investment can tick plenty of boxes. Residential properties are lucky to be making a return of between 2.5-3%, so without some serious capital gains, returns are looking pretty low. This is partly because residential property owners are responsible for outgoings, including council rates, water rates, repairs and maintenance.
By comparison, in commercial property, tenants are responsible for the majority of all outgoings. As a result, yields from quality commercial property can be in the order of 6-8% and when combined with capital growth, total returns are much higher, often 12-13%, or more. For example, Centuria unlisted property trusts over the past 18 years have offered investors, on average, total returns of 13.2%.
Needless to say, a higher return doesn’t come without some risk, and in commercial property, one of the biggest risks is vacancy. But that’s where it’s important to look at the track record of the property manager you are investing with – how well they have managed vacancy across their portfolio in the past, and how competent they are at maximising both rents, and capital gain.
But if these factors are covered, and despite some global economic malaise and the prospect of rising rates, the right commercial property will continue to perform strongly in 2017.