High-yielding countercyclical opportunity with enormous future potential

7 February 2023

Vendors are currently willing to sell assets at higher yields, offering investors fantastic opportunities to make countercyclical plays and lock in strong returns that will outpace inflation over the medium to long-term.

Among the best opportunities currently available is a low-risk, high-yielding investment with a long WALE to a national tenant, 446 Maroondah Highway in Lilydale. Fitzroys Director Paul Burns and Division Director – Agency, Chris James are marketing the asset, which is priced to sell on a circa 5.5% net yield.

Burns said the Reserve Bank Governor and Treasurer’s stated a target inflation rate of 2% to 3% in the early 1990s, and Australia has generally been within this band since (see table below).

“The current level of inflation is not expected to persist long-term. Assets purchased now, at historically high yields, will prove to be very prudent investments,” he said.

“It’s a great time to start looking at buying property when vendors are selling at higher yields.

“This is an excellent countercyclical opportunity that will be cash positive relative to the cost of money once the rate of inflation eases and interest rates normalise.”

Inflation is broadly expected to soften throughout 2023 and further into 2024. The Reserve Bank is forecast inflation to come back to 4.75% by the end of 2023 and 3.25% by the end of next year, while major lenders and many economists share a similar view.

The large, elevated corner site at 446 Maroondah Hwy is 6,229sqm, zoned Commercial 2, comprises a two-level 2,412sqm fully-leased building plus a very generous carpark allocation (100 bays) and 100 meters of street frontage. It is being offered with a brand- new 10+5+5-year lease to national company Belgravia Health & Leisure, accounting for 96% of the income.

Belgravia, which has 170 sites across Australia and New Zealand will operate three business on site – a Genesis Fitness Centre, Jump Swim School and Pursuit martial arts school.

Lilydale Hair Co occupies the balance of the property (85sqm) on a new seven-year lease.

The building has undergone a $3 million renovation and returns $532,000 per annum net. It has a Weighted Average Lease Expiry (WALE) of almost 10 years.

Burns said that as well as representing a low-risk, high-yielding investment with a long WALE, the property offered outstanding tax benefits and enormous future potential, being on a significant land parcel positioned in a high-growth area.

He said there is a significant surplus of tenant demand from name brands such as Hungry Jacks, Kia, MG and Total Tools.

“These and other tenants are looking for representation in Maroondah Highway, Lilydale, however, there are no vacancies. This will inevitably result in ongoing rental growth as tenants outbid one another for the rare alternatives that arise.”

ìThe newly undertaken significant building upgrade at the property avoids the need for much or any capital expenditure, as well as providing outstanding tax depreciation benefits.”

Burns also noted that while the property is fully leased long term, it is significantly underdeveloped, with the entirety of the income derived from a site coverage of just 27%.

“This is one of the best land bank propositions in an area that’s earmarked for a period of rapid growth. Investors will be able to enjoy a secure income stream from a recognised tenant while assessing the value-add and development options encouraged by its location within a Major Activity Structure Plan.”

The property’s future development and value-add potential is boosted by the Lilydale Major Activity Structure Plan (2019), which encourages higher density uses in the precinct. The property is located within the Plan area, which will see demand for an additional 10,000sqm of retail floorspace and 11,000sqm of commercial floorspace over the next 15 years.

The property is next to Toyota and is surrounded by other major automotive dealers and large format retailers such as Holden, Sangyong, Suzuki, Pedders, Supercheap Auto, Repco, MycarTyre & Auto, McDonald’s, KFC and Ampol. Burns said Lilydale has become an important commercial centre in its own right, and is the gateway to the famous Yarra Valley food and wine region, one of Victoria’s premier tourist destinations and which is experiencing significant growth.