Commercial investors to buy up alternative real estate: Nerida Conisbee

EXPERT OBSERVER

We predict commercial investors will buy up alternative real estate.

Alternative assets are defined as illiquid and traded only through private markets. This includes real estate, private equity, car washes, childcare, medical centres, service stations and self-storage. In short, the property element of anything that is income generating. 

In some cases, real estate debt is classified as alternative. According to a recent report from Cushman & Wakefield, this was a big growth area in 2019. As shown in the chart below, 2019 was a very strong year for commercial property transaction volumes. 

While there was disagreement amongst commercial property researchers as to whether it was the highest volume ever recorded, or the second highest, it was certainly a big year, notes Conisbee.

Conisbee explains the significance of this, On one hand, it does show there is no shortage of money – lots of investors, both local and offshore are very keen to buy commercial property in Australia.

There are a lot of reasons for this. Finance is cheap, there is lots of money around, tenant demand is strong and Australia’s relative political and economic stability compared to the rest of the world makes it a safe option.

It does, however, also mean that a lot of people were selling. In particular, although offshore investors were a big component of the high volumes, they were also big sellers. Part of this may just be a realignment of portfolios (e.g., too much Australia, not enough Canada) but it could also be because some think Australian commercial property is at the top of the cycle, getting too expensive and now is a great time to sell before there is a correction.

In 2020, conditions are likely to continue to be positive for most sectors.

Office vacancies remain very low in Melbourne and Sydney and are falling in Brisbane and Perth.

Industrial demand continues and high yielding alternative assets are popular with those wanting a decent return.

Development site values are likely to rise as the residential market continues to recover. There are however a few negatives – conditions for retail property continue to deteriorate.

Unless your tenant is a luxury retailer or you are in an inner urban area that has seen lots of new apartments, you are probably getting minimal rental growth, at best, or are struggling to get a tenant. The bushfires are also likely to have mixed impacts – global real estate firm, Heitman, has dropped their attractiveness ranking for Melbourne and Sydney over concerns about climate change and fire risk. On the other hand, the rebuilding effort could be positive for demand for some commercial property types.

Nerida Conisbee is the chief economist for REA Group.