03 Feb Cautious optimism on commercial front – Vanessa Rader
THE outlook for the commercial property market is mixed heading in to 2019, with financing difficulties set to continue but some markets outperforming others, according to Ray White’s Head of Research Vanessa Rader. We talk to Vanessa about the commercial market overall.
Kevin: We know about the tight lending restrictions on residential property. What’s happening in the commercial property sphere? Joining me now are Ray White’s head of research, Vanessa Rader, talking about the commercial area. What are you hearing from your agents around Australia, Vanessa?
Vanessa: Well, it’s far more difficult to obtain funding for commercial assets than it has been in the past. So while there still is money to be lent, there’s probably a … if you look at the loan to value ratio, that’s definitely changed. So, people that’ll be looking to buy small commercial assets probably just don’t have as much availability to finance as they have in the past, which means that each development needs to find a larger deposit, which then makes it a little bit more difficult to go ahead and go through and purchase that property.
Kevin: Are there any states in Australia that are better than others in terms of their returns and how comfortable the banks are at lending?
Vanessa: It’s not really about states. It’s probably more looking at regional areas versus metropolitan areas. So, in the past, the banks have been quite happy to lend on assets in regional locations. So not in your major cities and kind of country locations based on a return, whereas now, the banks are taking a step back and really considering those assets that are now those secondary-type locations, and there’s a greater consideration to that. So, it’s not necessarily a state thing. It’s more of regional versus metropolitan.
Kevin: How’s the market feeling about … you know, we’re headed into a couple of elections, both state elections and a federal election. Does that have much impact on the market in terms of confidence?
Vanessa: Whenever there’s an election, there’s always some sort of uncertainty that’s surrounding with that. However, I’ve gotta say, this time around, there seems to be … that’s been in play for the last, say, six to eight months. So I think some of that uncertainty has already been factored into the commercial market at the end of last year. So I don’t think there’s gonna be a massive change in the beginning of 2019 in the lead-up to the election. I think that there is this subdued … it’s not really a confidence thing now. I think it’s more of a, just take your time, have a look at the assets that come to you. It’s just more of a slow process, I’d say. People are being more considerate of their options, and so rather than rushing in … We saw last year and even the year before, we saw this kind of fear of missing out, people jumping in and purchasing things, whereas we’ve seen late last year, that really started to slow and I think will be much the same into 2019.
Kevin: We’ve heard some stories about people wanting to move away from residential, not so much moving away from it, but maybe diversifying their portfolio more. Are there newer entries into the commercial sphere because of that?
Vanessa: Yeah. I really think that that’s a story that played out 18 months ago. We saw a lot of people, when the residential market … even two years ago … when the residential markets, particularly in New South Wales and Victoria really heated up, that they were looking for alternative investments that had a better return. So we did see a lot of these small investors coming to the commercial markets. And I’m talking about the sub $1.5 million price point was really active, but even the sub $4 million price point. It didn’t really matter what the asset was. We saw a real growth in people interested in things like service stations, childcare centres, as well as small retail, office, and industrial assets. That’s something that played out, like I said, 12, 18 months, even 24 months ago, and we’re starting to see that really subside now because of this financing issue.
Kevin: Are your agents experiencing any increased activity from institutional buyers, groups getting together, or is it more individually driven?
Vanessa: There is an awful lot of those small funds, if that what you mean.
Vanessa: A band of small private investors all coming together to provide a little small syndicate. Yeah, again, that’s something that we saw happen last two years. It’s still happening now, to a lesser extent though. But yeah. If it’s difficult to get financing, if you can band together with other people that are high net worth people that have the ability to raise funds, that definitely still is occurring in this market.
Kevin: Is there a sector of the market that’s accelerating rather rapidly? I remember a few years ago, childcare was really what everyone was looking for.
Kevin: Is there a category that you think is gonna be popular in 2019?
Vanessa: I think that probably looking back to the fundamentals. I think the industrial market is still a good market to be into. I agree that … and that probably plays into that comment that I made, the last two years, 18 months, where we saw a lot of people jumping into the market. That’s why we saw assets like the childcare and the service station really grow in popularity. I think that this year, we’re going back to property fundamentals, taking our time with considering our purchases. So, asset classes, like industrial, that have always had a really long-term demand for them, for tenants and for buyers, is probably one to watch this year. Also, with the change in terms of retailing, there’s been a move away from small retail assets, and industrial is obviously really important when it comes to logistics and to the storage of goods. So industrial is probably one that I would probably feel most confident with going into 2019.
Kevin: Mm-hmm. Thinking more now internationally, there’s a lot of unrest internationally with what’s happening in America, China, and so on. Are we seeing a lot more confidence in Australian commercial real estate on the world sphere?
Vanessa: I would say so. I think Australia has always been considered as a real safe haven to put your money. So that’s why we’ve seen a lot of foreign buyers come to Australia. That’s been dampened most recently with a lot of that government initiatives in terms of increases in fees and whatnot. But I do think that Australia does operate quite differently to those larger markets around the world. There is always a really good strength in the Australian markets’ large institutional buyers, and we still see large institutions looking to invest in Australia, both domestically and from abroad. So look. I think Australia’s still doing well in terms of the property market going forward, and it will still be a really robust 2019.
Kevin: Vanessa, thanks very much for your time. Appreciate it.
Vanessa: Thanks so much.