Industrial property tipped to exit pandemic most unscathed

According to new research warehouses and other industrial property will likely be the commercial asset class, to emerge after the pandemic, as most unscathed.

While previously Australia waited to witness the direct social and economic impacts the pandemic would have on the property market, now that restrictions are beginning to lift, we are slowly getting a glimpse into what the future is set to look like.

Prior to COVID-19 the industrial property sector had seen growth, with high investment from international groups, in the Australian market. However, just like almost every other sector, the industrial property sector did take a dip following the onset of coronavirus restrictions in Australia. Unlike other sectors, at the moment the demand for industrial property is expected to rebound, with a continued increase in revenue in the coming years.

Industrial property, especially prime-grade assets, in Melbourne were showing to be incredibly resilience at this point, given the state of the economy. In some areas, despite the work from home orders from the government, office space is outperforming industrial property. While this is expected to be short-lived, the areas that already see industrial property outperforming office space are only going to witness a further increase in that margin, as the pandemic continues.

Development activity in Melbourne over the past year has been strong with the continuing increase of industrial spaces. With south-east Melbourne being the most popular destination in the state for industrial property, it is expected to outperform other areas in the following months.

During the stay at home restrictions, online retail in Australia saw a huge increase in sales, as storefronts closed over the country. Due to this third-party logistics companies with capacity, are looking to secure more industrial space to accommodate the demand. This could lead to a huge demand for warehousing over the next six months, especially in Victoria, since it is the hub for national distribution activity.

Retail isn’t the only sector that may be looking for more industrial space, with the current situation resulting in an increased demand for home delivery services. This is where cold storage facilities especially are set to benefit. The requirements for increased cool room and freezer space will be seen across Australian CBD’s, specifically hubs for hospitality and restaurants such as Melbourne and Sydney.

Over this time, we also expect to see an increase in demand for Australian products. The inability we now have to bring a large amount of stock in from overseas, is making customers more conscious of the safety behind where are receiving imports from.  The reduction in export and import activity delivers a huge opportunity for greater locally manufactured goods and services, which can be easily and quickly distributed into the local communities and across the country. Reinvigorating Australian manufacturing of goods and services will result in the need for bigger and more industrial spaces locally. Once again increasing the reliance on the industrial property market for our ability to continue to increase our local supply chains.

Nonetheless, after the pandemic is over securing adequate storage is likely to be the first thought for many companies who saw an increase in their business as a reaction to the restrictions. This will lead the way for industrial property needs to increase even following the pandemic, depending on how long we remain in a crisis state.

This demand for industrial space is expected to remain strong throughout the pandemic and beyond. The situation might also give a boost to local manufacturing activity, which could further stimulate industrial sales and leasing activity.

Suburban Melbourne’s commercial real estate fundamentals are strong

As governments around the country begin to ease social distancing rules an interesting commercial real estate trend is emerging which is set to create opportunity for investors focused on suburban and outer suburban markets.

Commercial analysts and business reporters have noted significant negative impacts on CBD commercial real estate markets, including for Melbourne’s CBD. In particular commercial office property in CBD markets looks set to take as much as a 15 per cent hit on value. The drivers for this are two-fold.

 

First, many businesses have been hit by the close down of the economy during the imposition of strict interpersonal isolation measures.

Second, and perhaps more importantly, the dramatic rise in work-from-home arrangements, combined with reassessment of exactly how office spaces will need to be configured to allow “safe” working environments in the future has many white collar businesses considering alternatives to cramming staff into expensive CBD office space.

There are reports that a number of large corporations are seriously considering whether to remain head-quartered in CBD offices when there are fringe CBD and suburban opportunities available that are considerably more affordable and will allow the appropriate amount of office space per worker when business and office attendance starts getting back to normal.

An additional variable is concern about the health and safety impacts of work commutes, particularly on public transport, where employees are clearly more exposed to potential infection.

Consequently, well serviced commercial real estate markets like Melbourne’s south-eastern suburbs look set to benefit from potentially major changes in office rental demand. And it’s not necessarily a short-term trend – a recent article in The Australian indicated that CBD office vacancies are not likely to peak for at least two years – investors in those spaces are likely to experience significant reductions in yield as vacancies soar and rent waivers and deferrals remain unmet by struggling businesses.

Even where businesses decide that a CBD presence is warranted or necessary, many are looking to “hub and spoke” office models, where a small CBD office presence is supported by larger back office support which is headquartered in outer suburban areas.

Many businesses will be looking for ways to maintain efficiencies, reduce the impacts on employees of difficult commuting options in the context of social distancing and deliver safe and healthy work spaces at affordable rates. Businesses are even having to consider issues such as how employees enter buildings and the efficacy of using lifts and elevators in the context of social distancing – an issue that is much more manageable in lower density suburban office space.

However the easing of social and economic restrictions plays out over the next few months, it seems clear that the commercial real estate opportunities for suburban and outer suburban areas like Melbourne’s south-east will continue to benefit from an already strong base.

Melbourne’s strong fundamentals positive for commercial real estate

In the midst of social and economic lockdown, most landlords and vendors think the world has stopped. But Melbourne’s strong commercial real estate fundamentals coming into the pandemic have continued through and activity, particularly in Melbourne’s commercial suburban market, is continuing strongly.

Just this month, for example, realcommercial.com.au has reported significant commercial real estate activity, including leasing of a large multi-level office site at Box Hill and sale of a large development site at Glen Waverley with zoning for residential aged care https://www.realcommercial.com.au/news/box-hill-offices-take-top-billing-in-victoria.

Much of the reported concern about the immediate future of commercial real estate has focused on two things:

  1. Retail is under considerable pressure due to social isolation measures and online shopping will become the norm.
  2. The move to working from home signals a paradigm shift in the way that people will work into the future.

While there is some element of truth to these concerns, perhaps the hype won’t be realised. The reality is that Australians don’t like being cooped up at home with limited social contact and physical interaction. The Victorian government is now talking positively about serious easing of restrictions once the current state of emergency is over on May 11.

Retail must bounce back – it may take some time, although analysis of jurisdictions where governments have already started to lift restrictions indicates that shopping centre attendance is nearing pre-pandemic levels already. Online shopping is not a new phenomenon – it’s one that retailers have been facing for some time. But there is a significant proportion of the population that still wants to try on shoes before buying rather than taking the risk of ill-fitting footwear manufactured overseas!

Interestingly, much of the commentary about a permanent move to working from home is coming from individuals and sectors which already do it or will benefit from it in terms of substantially reduced costs. But, again, most Australians want to work with colleagues face-to-face. And we only have to listen to anecdotes about spouses sharing trips to hotels in order to get work done away from the kids to realise that the end of the office is nowhere near in sight!

The final material opportunity presenting itself to commercial real estate investors is the likely increase in domestic manufacturing as governments seek to stimulate the economy and address impacts associated with dramatic increases in freight costs and negative sentiment towards imports, particularly from China.

Melbourne’s south-east is particularly well suited to light and medium manufacturing, transport infrastructure and facilities available. A push to increase domestic manufacturing could result in a small boom in light manufacturing zoned real estate in the region.

There is no doubt that the commercial real estate market will experience change as a consequence of the COVID-19 pandemic and there is undoubtedly some short-term pain for both landlords and tenants in some areas. However, the opportunities loom large and, with market fundamentals as strong as they already are in Melbourne, our city could stand to benefit considerably.

Coronavirus implications for Melbourne commercial property market – what’s in it for property investors?

It’s hard to escape the dominance of the economic impacts of COVID-19 in media and business reporting. Governments and businesses around the nation have been focused on it and there have a been a range of responses aimed at addressing the impacts on commerce. In relation to commercial property, the impacts are evident for both landlords and tenants.

Retail property is particularly heavily hit, with major reductions in retail shopping traffic as a consequence of social isolation measures. Of course, there has been considerable debate around the respective roles of tenants and landlords with respect to rent relief. Various government approaches around the country have been either applauded or criticised – the Queensland government coming in for particular criticism for introducing measures heavily weighted against landlord rights.

In this context, the Victorian government has been seen to attempt to strike the balance right, introducing a $500 million dollar rent relief package aimed at securing positive outcomes for both landlords and tenants. Some $420 million of that is targeted land tax relief for landlords aimed at providing them scope to ease the burden on tenants who have experienced declining business conditions. This is one of a raft of government funding responses to the unprecedented economic challenges facing Victorian businesses and time will tell whether or not it is more or less effective in staving off the worst of the impacts.

However, while governments are quite rightly focused on the immediate responses to the COVID-19 challenge, some in the economy are looking to opportunity and what happens beyond the current social and economic lock down.

The question we ask is what are the opportunities that will emerge in the commercial property sector over the next six to twelve months?

One of those opportunities clearly relates to light and medium manufacturing. A key impact of the pandemic has been the reduction in export/import activity driven by a range of factors including some negative sentiment to Chinese manufactured goods, dramatic increases in freight costs and an emerging sentiment towards reinvigorating Australian manufacturing.

With travel expected to be muted for at least twelve months and governments looking to increase economic stimulus and job creation in Australia, it is only logical that light and medium manufacturing enterprises will be favourably supported as the economy starts to open up again.

In the office space, while there are immediate challenges, and there will undoubtedly be material changes in the way Australians work into the future, there is also likely to be ongoing growth in demand for quality office space, particularly in urban and peri-urban areas – that is, outside CBDs. This emerging trend taps into pre-virus trends which saw an increased interest in outer suburban quality office space, offering a broader range of amenities for workers without the commute.

Another interesting observation is that, while shopping centre retail in Australia is still subdued, analysts looking at trends in other economies, including Singapore, have noted that shopping centre retail and foot traffic has lifted substantially and is approaching nearly the levels experienced prior to the pandemic. https://theurbandeveloper.com/articles/ubs-give-three-coronavirus-pandemic-scenarios-for-a-reits  Is this a sign for Australia’s recovery? It’s hard to know at this stage but the indications are positive.

Whichever way the economic recovery shapes up, there is no doubt that the way business is done will change and that will have implications for the commercial property sector. The challenge is to recognise the negative impacts and look for the new and emerging opportunities. Melbourne’s south-eastern property market presents a number of unique opportunities to capitalise on the new economy.

March 2020 Update

It’s business as usual for Just Commercial.

We are playing our part in helping to stop the spread of COVID-19 by following the advice passed on by the Australian Government, and as such our team are working remotely.

Our staff, clients, and the general public are of the utmost importance to us. We are fully operational and accessible at any time, so please do not hesitate to contact us as you normally would.

We are continuing our business operations across our portfolios of Property Management, Rental Collection & Disbursements, ESM Compliance, Accounting and of course, Sales & Leasing,

Just Commercial is your partner through both good times and bad. If there is anything we can do to be of assistance during this challenging time we are happy to help.

Kind regards,

The Just Commercial Team.

Steven Kalb | 0408 499 909 | steven@justcommercial.com.au

James Taylor | 0418 538 039 | james@justcommercial.com.au

David Kalb | 0499 333 123 | david@justcommercial.com.au

Con Devatsakis | 0407 046 934 | accounts@justcommercial.com.au

Aviva Basist | 0438 866 626 | aviva@justcommercial.com.au

Christine Bonacci | 0414 464 080 | christine@justcommercial.com.au

Jeanne Pickering | 0418 391 661 | jeanne@justcommercial.com.au

Dani Rosengarten | 0418 382 044 | reception@justcommercial.com.au

Is commercial property investment out of reach for smaller punters? Think again.

Residential property investment is a bit of a national pastime for Australians – more than two million Australians own at least one investment property. In fact, CoreLogic estimates, the overall value of residential real estate across Australia to be $6.5 trillion across 9.6 million dwellings. As an asset class, housing is now worth more than three times the value of superannuation funds across the country ($2.0 trillion) and more than four times the value of Australian listed stocks ($1.5 trillion). It is further estimated that investors own 27% of Australian dwelling stock by number and 24% by value, while about 47% of the value of new mortgage originations are for residential investments which provide the vast majority of rental housing across Australia.

That is an enormous amount of investment capital and economic activity, driven largely by Mum and Dad investors. But many residential property are tentative about commercial real estate investment and feel that it is outside their capacity to participate in the sector.

However, the reality is that a savvy commercial real estate investment is within the reach of many residential investors.

Commercial real estate market, realcommercial.com.au, notes that while the two markets are very different and building a strong commercial property portfolio can be challenging and presents a different risk profile to residential investment, the wide range of price points and potential locations means that commercial investment is feasible for many.

Commercial real estate has many benefits – portfolio diversification, tax effective ownership structures, depreciation advantages, locked in annual rent increases, tenants pay outgoings and diverse price points. There are also some challenges – finance terms tend to be stricter, there are usually larger gaps between tenancies, there is greater exposure to economic cycles, repairs and maintenance can be expensive and commercial properties are harder to sell.

If you think you might be in the market for a commercial real estate investment, there are some key nuances that you should have your head around.

  1. The tenant

The quality and commercial viability of your tenant is critical. Ultimately you want a tenant that is well matched with the property with respect to location, is operating in a strong sector with good long term prospects and is performing well. Acquiring a property with an existing tenant is also desirable.

  1. The lease

Commercial leases are generally longer than residential leases and actually underpin the value of the property. Ensuring the lease conditions are right and taking strong expert and legal advice is critical to getting the most out of your commercial investment.

  1. Economic conditions

Commercial tenants are more exposed to economic and trade volatility. Demand for products and services can be fickle and matching your property with the right sectors is critical.

  1. Location

Location affects value and it affects the type of property you are looking for. Taking a broader view of location also provides a much wider range of price points to consider for similar types of property.

  1. Planning and infrastructure

Local and state government planning and regulation, potential infrastructure developments and location of supportive infrastructure are all important. Consider, for example, the impact on both tenants and building owners from developments such as Sydney’s light rail project, which has seen numerous businesses close down while construction was ongoing.

  1. The property

The property you invest in needs to be suited to the businesses you are hoping to attract, needs to be in good basic condition and needs to be at a comparable price point to the market.

South-east Melbourne commercial property outlook for 2020

As we near the end of a year which has continued to see lowering interest rates and ongoing population influx into Greater Melbourne, it is timely to consider what will be some of the important trends influencing the commercial real estate market in south-east Melbourne in 2020.

Is location still king?

It’s the age-old real estate investment mantra – location, location, location. But what does that mean for commercial real estate in a city like Melbourne? Globally, the reality is that having a CBD office location is no longer what it used to be. In this modern world of technology and high quality digital communication, commercial tenants – businesses with employees – are looking for ways in which they can attract and retain the best talent. And that no longer means expecting employees to spend an hour or more commuting to work on a crowded bus, train or tram, or battling peak hour traffic. Employers are looking for opportunities to create business ecosystems for staff – combining ease of commute with pleasant locations and flexible work spaces, close to good amenities and with high quality technological facilities. https://www2.deloitte.com/content/dam/insights/us/articles/5190_commercial-real-estate-outlook/DI_Commercial-real-estate-outlook.pdf

That means that many commercial office tenants are looking for locations such as Melbourne’s south-east to provide a different experience for employees.

Population and economic growth

Melbourne has Australia’s strongest population growth, including welcoming about 35% of all overseas migrants to Australia. While many of those internal and overseas migrants might end up working in the CBD, most of them reside in Melbourne’s suburbs, including the south-east. And that means more local business requiring retail and restaurant real estate, for example. With a robust economy and strong jobs growth, this trend is not likely to abate and that bodes well for the commercial market in the south-east. Melbourne is also one of the ten fastest growing cities in the developed world. https://propertyupdate.com.au/property-predictions-for-2021-revealed/.

Infrastructure and transport

The Victorian government’s infrastructure development agenda is in full swing. However there are question marks about whether it is targeted to the right places, such as south-east Melbourne, to generate increased supply of industrial land supported by effective road and rail transport, water, sewage and power infrastructure. Currently there are about 360 hectares of undeveloped, zoned industrial land in the south-east which is likely to come on stream over the next 36 months. https://www.commercialrealestate.com.au/news/industrial-feature-land-shortages-901095/. There is also significant competition for that land which has seen prices for newly available serviced land increase by nearly double over the past two years.

CBD pressure

Melbourne’s CBD has experienced unprecedented commercial office occupation rates over the past few years. Despite that, yields have been compressed although capital gains have grown, keeping total returns above 10%. This is expected to continue in the short term. However, there is  nearly 600,000 square metres of space expected to come on stream in the Melbourne CBD over the next few years. This will put pressure on both yields and capital growth and is also likely to see vacancy rates increase substantially to around 8%.

All that suggests that now might be the time to consider investing in suburban Melbourne commercial real estate. https://www.afr.com/property/commercial/commercial-property-markets-set-for-double-digit-returns-in-2020-20191118-p53bo2

 

 

 

Population growth in Australia’s suburbs influencing commercial real estate markets

Australia’s main capital cities are experiencing unprecedented population growth and Melbourne’s outer suburbs are the fastest growing regions in Australia. This growth is set to drive Australia’s real estate markets over the coming years. While the implications for residential real estate are already becoming apparent, there are emerging positive trends for the commercial real estate markets in these regions and Melbourne’s south-east is.

On the residential side of the coin, job opportunities, available and affordable real estate and improving transport infrastructure, including public transport, are major drivers. However, on the commercial side of the coin the factors are a little more complex.

The first signs relate to Melbourne’s city fringe suburbs such as Richmond and Cremorne, where commercial rents have nearly doubled in five years.

Drivers for the shift from CBD to CBD fringe and now into more suburban locations is being driven by a diverse range of factors, including rapid population growth which is leading to increased business activity, combined with a desire by employers to improve employee work-life balance. This is manifest in shorter employee commutes and access to increasingly sophisticated staff amenity in suburban locations, such as shopping and food.

Additionally, there is a widening gap in rentals as the CBD office occupation costs increase. Another major driver is improved information technology infrastructure.

With its rapid population growth from both overseas and internal migration, buoyed by Australia’s strongest state economy and a massive state government infrastructure development agenda, Melbourne is expected to have the largest workforce in Australia by the middle of the century.

The reality is that the CBD, even with new office developments progressing, has limited expansion growth and remains expensive. In fact, Australia is estimated to require an additional 13 million square metres of office space by 2050 and that won’t be met from CBD office developments. Australia’s capital city office and commercial property markets simply have no choice but to look to suburban expansion

For many businesses it simply makes sense to seriously explore enterprise expansion in places where commercial property is affordable, there is a large, increasingly well trained population that is more than happy to seek employment opportunities with a reduced commute time and improved transport infrastructure means that moving people and goods is no longer the challenge it used to be.

The importance of adequate and up –to –date Insurance coverage!

By Michael Catts, Principle at Marsh Advantage Insurance.

As a professional insurance advisor, Michael Catts is constantly reiterating to clients the importance of adequate up- to- date insurance coverage.

When it comes to commercial property owners specifically, there are a number of extremely important aspects to consider.

Adequate Building Insurance cover against Fire and Extraneous Perils (e.g water damage, storm damage, impact by vehicle and vandalism).

The basis of valuation for commercial properties under most commercial insurance policies is defined as the cost of rebuilding or reinstating your property using similar BUT BRAND NEW materials. Therefore what is important to ascertain is the cost of the required materials, the cost of the required labour, engineers and architects fees that will need to be incurred as part of the process, necessary removal of debris costs, and the extra costs of reinstatement due to changes in local by-laws or building codes/regulations. This is the information necessary to determine your BUILDING SUM INSURED for insurance purposes.
Know what exactly is defined under your insurance policy as the BUILDING.
Generally speaking, “BUILDING” includes the foundations, storage tanks, awnings, exterior lights, masts, antennae and aerials, fixed external signs, walls, gates, fencing, pavements and other structural improvements, property owner’s fixtures and fittings, floor coverings, plant, plumbing or wiring services that are within the building.
“BUILDING” does NOT include land, including topsoil, fill and dams, landscaping, reservoirs or canals.

Do I Need Public Liability insurance coverage if my tenant has their own Public Liability?

The answer to this question is quite simply YES. Your tenant’s Public Liability insurance cover provides protection for your tenant if they have negligently caused injury to other persons or damage to other property ARISING FROM THEIR BUSINESS ACTIVITIES AND/OR OCCUPANCY OF YOUR PREMISES. YOUR Public Liability insurance cover on the other hand provides protection for YOU if YOU have negligently caused injury to other persons or damage to other properties ARISING FROM YOUR RESPONSIBILITIES AS THE OWNER OF YOUR PREMISES.