Industrial has been the standout asset class of 2023, amidst challenging times for the commercial property sector, according to one of Australia’s leading commercial property experts.
Ray White Commercial Head of Research Vanessa Rader said commercial property had experienced a tough 2023, due to fast-rising interest rates and the challenge of obtaining finance. That’s led to a significant reduction in listings and sales volumes, a reduction in capital values and an increase in investment yields.
Looking at the performance of the three main asset classes this year, retail and office have struggled, but industrial has shone, Ms Rader said, referencing recent data from MSCI.
Industrial
Ms Rader said industrial assets were performing well due to a combination of strong demand and limited supply.
“While the sizable rental growth over the last few years has now slowed, capital returns continue to be positive across most regions,” she said.
This capital growth has led to reduced yields, with industrial ‘cap rates’ (i.e. capitalisation rates) now at a historically low level, even though industrial has traditionally been a high-yield asset class.
“Industrial, despite seeing upward momentum from this record low cap rate, remains the most sought-after asset class keeping yields averaging just 4.6% this period. Distribution/logistic assets and industrial parks recorded the lowest cap rates at 4.5%, with lack of stock and the stable income streams associated with these assets remaining attractive to investors,” she said.
Retail
By contrast, retail has been going through a prolonged difficult period, according to Ms Rader.
“Competition from online trading has caused issues for brick-and-mortar retail which has kept returns below other commercial asset types. While returns did see some resurgence over the last few years, where sales activity peaked, these have again moved downwards despite the consistency of income return. In June 2023, average retail capital return fell into negative territory to -2.7%,” she said.
“All segments of retail have been impacted by these capital changes, from larger super and major regional centres (-1.9%) through to neighbourhood (-4.4%), however income returns remained steady at 5.3% and 5.2% respectively.”
Office
Meanwhile, the office sector has continued to be affected by the work-from-home trend.
“Office has been faced with significant difficulties spurred on by work from home trends born from the pandemic. Low unemployment and office supply are adding to the difficulty for this sector, which has been hampered by the high vacancy environment, resulting in strong incentives impacting effective rental rates,” Ms Rader said.
“CBDs have seen greater change in total returns at -2.3%, while non-CBD sits at -1.3%. Again, some stability in income is keeping these rates elevated while capital losses average -6.5% and -6.1% respectively.”
Why a broker can help in this market
I love helping businesses and individuals purchase commercial property, whether for direct use or investment purposes.
As Ms Rader mentioned, this is a more challenging finance environment, which is why it’s helpful to work with a broker who can research the lending market for you, find a lender and loan structure that works for your situation and package your loan application in a way that will appeal to lenders.
