Commercial investment in regional Australia falls

Historically there has been sizable investment into commercial assets outside of traditional metropolitan locations. Local private investors have been the greatest buyer type, while funds and trusts have looked to larger regional centres, particularly for retail assets. However, over the past few years we have seen new entrants speculating into these regions. Investment levels across regional Australia peaked in 2021 across all commercial asset types, however, the rising interest rate environment has seen a rapid turnaround in results.

In the period prior to the COVID-19 pandemic, national investment levels remained relatively stable, averaging annual commercial turnover of $9.98billion. However, upon the swift reduction in interest rates, we saw investment activity peak in 2021 at $16.41billion. Investment was recorded strong across all asset classes, with retail being the number one choice, followed by industrial and office. The low barrier of entry for smaller strip shops and industrial units is particularly attractive to first time buyers and investors seeking out attractive yields during a time of strong compression in capitalisation rates across the country. Moving up the risk curve into regional markets was commonplace with interstate interest high by private investors and syndicates as buyers sought out returns rather than traditional property fundamentals.

As a result, during both 2021 and 2022, a strong uptick in investment into “other” assets was recorded. In 2021 we saw a 21.96 per cent increase on 2020 levels with assets such as childcare centres, healthcare facilities and service stations in hot demand. Despite total volumes reducing in 2022 upon the commencement of interest rate rises, investment into these “other” assets did not, representing 12.32 per cent of all sales. Also showing growing demand during these two years was the hotel and tourism sector. Investment into pubs recorded significant increases and accommodation assets saw a resurgence, notably for smaller motel facilities and caravan parks. Lockdowns and restricted travel resulted in greater regional travel which benefitted these asset types, with a range of private buyers looking to capitalise, as well as owner operators adding to the tree and sea changers which moved to regional areas during the pandemic period.

Historically, Queensland has been the market of choice for regional investors with the numerous major centres, particularly along the coast, and strong growth in population fuelling investment demand. Investment has averaged 39.06 per cent of total turnover over the past ten years and, despite the slow down in transaction volumes in 2023 to date, activity in Queensland has grown to over 40 per cent. NSW also saw consistent activity prior to COVID-19, but peaked in 2021, with over $6.11 billion in activity, due to a strong increase in industrial and hotel and tourism asset sales, with tenanted investments including retail, childcare and service stations seeing similar uptick.

Queensland was not the only market to field growing enquiry off the back of an increase in interstate migration. Investment into WA and SA also reached new highs during the pandemic period, with industrial being the major drawcard. Affordability was a major consideration for investors seeking out high yielding options in interstate locations, resulting in Tasmania growing its investment to $557.88million in 2021, with the previous high just $387.20million in 2015.

Increases in interest rates have been instrumental in reducing activity across the smaller commercial property markets. Many first time buyers, interstate speculators, and developers were quick to retreat and investment levels saw strong declines, however, experienced buyers continued to transact albeit seeking out returns or value add opportunities more aligned to the rising finance risks. Moving into 2023, and after 12 interest rate increases, buyers have been slow to transact. In the first seven months of the year total volumes have reached $3.37billion in regional markets, Queensland remains the favourite investment region followed by NSW and Victoria with WA and SA on par. By asset class industrial continues to forge ahead with owner occupier’s being a major investor, followed by retail and office sales. Activity across hotels and other asset classes notably childcare remains highly sought after by the private investors albeit at the right price given the increased cost of funding.