The state of play: South East Queensland commercial
Our research team and agents indicate that the South East Queensland commercial property market is looking strong coming into the end of 2016. Luckily, the volatility of the residential market is not spilling over and industrial, retail and most other commercial property investment classes are yielding great results both in terms of sales and investment returns.
Few know the market in this part of the country better than Tony Williams – the Executive Director for Ray White Special Projects in Queensland. With almost a quarter century of experience in commercial real estate in Queensland, he is one of the foremost commercial real estate operators in the area. With the goal of making your decisions just a little easier and better informed, we’ve picked Tony’s real estate brain to help keep you up to date on the current state of the South East Queensland commercial property market. This is the state of play.
Industrial real estate is showing positive signs, proving to be perhaps one of the most reliable markets in the area according to Tony:
“Various sectors of the market are performing at different speeds. Industrial is proving solid, grinding along nicely over the past year or so. Sales turnover is down but there’s a lot of demand there.”
This high demand is accompanied by lower supply. This limited supply is due to recently low sales turnover, which our September report on the Brisbane Industrial market found sits at $210 million for the first half of this year.
For the second half of 2015 this figure was almost $800 million. This suggests that investors are valuing the solid returns that such investments offer and holding onto them instead of quickly selling for a profit.
Development may have some affect on the balance of supply and demand, with over 1.2 million square metres of industrial space coming onto the market over the next three years.
This high demand/low supply mix has placed pressure on yields which have been decreasing slowly since the end of 2014. South Brisbane returns average the highest at roughly 7.75 per cent, with yields in the Logan Motorway area close behind and ATC lagging at around 7.25 per cent.
These conditions necessitate focusing on a long-term investment plan, holding your property and ensuring the quality of your tenants.
Commercial and office space in Brisbane
The Brisbane office market has softened considerably over the past few months, entering a period of uncertainty. Despite this, demand from investors remains high, amidst falling yields, lower capital values and high vacancy rates (up to 16.9 per cent this month). Investment and cashflow are the focus for those investing in commercial spaces:
“Anything that is investment driven is extremely strong at the moment, with the current low-interest rate environment, yields are compressing for anything investment related. However the commercial leasing market is extremely soft and tenant driven currently,” explains Tony.
It’s worth noting that our August report on the Brisbane CBD office market shows vacancy rates in premium or A-grade commercial office spaces are the lowest – averaging at under 14 per cent – compared to B grade at 18.6 per cent. This suggests that premium office space may be the least risky if you can afford it.
The main positive amidst this uncertainty is the decreasing vacancy rates in office strata properties – down to 9 per cent from their August 2015 high of 11.6 per cent. If you’re looking to obtain a high-level office investment in Queensland, strata properties may prove lower risk as a result.
On the other hand, Tony commented that these market conditions are in favour of those looking to lease office space:
“If you’re a tenant looking to move into a property, you’ll have a lot of options to choose from. You’ll have a competitive landscape from landlords looking to attract tenants into their buildings, so it’s very possible to get a good deal on a space as a tenant.”
Tony made the point that the residential development market has softened recently despite land value indicators that suggest otherwise:
“The overall market is performing well, particularly in the land subdivision and townhouse sectors, a position supported by land value indicators.”
However, investors should look twice at residential development particularly in greenfield areas. Land values have steadily increased Queensland-wide since 2012, meaning that regardless of the success of developments the land that they are built on should provide a return thanks to capital gains.
Brisbane central in particular has seen the effects of this, with land values rising by $200,000 for the 3 years ending September 2015. There is little suggesting that these value increases will cease in the near future.
Adding value to up and coming residential areas, could be key to maximising profit from these land value gains in Brisbane and wider South East Queensland.
Invest out of the ordinary
Investors in South East Queensland have been having considerable success with properties that most wouldn’t look at twice. These include service stations at the lower end and aged care facilities for more sophisticated investors.
Interestingly, mum-and-dad investors have been pooling their assets or accessing their super funds to increase their buying power and purchase service stations as investments. For lower-end investors who can drum up the funds, these properties prove ideal thanks to long-term, blue-chip tenants, stable income and relatively high yields.
Tony highlighted the fact that sophisticated investors have been seeing growing success in aged care facilities development:
“We’re seeing a lot more corporatisation of the aged care model, and we’re seeing a lot greater emphasis on infill sites and vertical aged care. A lot of these are in inner or mid-ring suburbs,” he said.
This may be in part thanks to government incentives and subsidies:
“The Brisbane city council have significant infrastructure credits available for investors in the aged care sector. They’ve been very forward thinking when looking at how they promote certain areas of the market to drive growth and remedy shortfalls in supply.”
These examples highlight the importance of thorough research and market knowledge before investing. In a market such as South East Queensland’s, the right approach and a thought-out strategy can turn uncertainty into a lucrative investment.