Interest rates are on everyone’s mind as investors evaluate their options.25 May 2023
Written by Peter Vines, Managing Director Ray White Commercial Western Sydney
I think it’s important to remember that the RBA needs to consider many indicators in the market right now – that includes what is going on internationally, but also local economic activity. There is no doubt the impacts of the rising cost of living and interest rates are unsettling many Australians and confidence is wavering. With a lot of uncertainty in the market, a lot of people are sitting on their hands when it comes to property investments but smart investors have seen the opportunity and are looking at the long-term ROI when it comes to commercial property.
Real estate is a cyclical market, so investors need to look at long term capital growth. If you’ve got the capability to buy when the market is down it will enable these investors to take advantage of the full up turn and ride the wave in the meantime. Income producing assets are a fantastic way to leverage the market right now whilst still gaining a stable income.
My top three buys in this market include:
- Blocks of units
- Childcare investments
- Industrial spaces
Blocks of units
Blocks of units are still a great buy in my opinion. With fewer buyers in the market, strong rental growth, and a prospect of capital growth with affordable housing being an issue in the coming years, these are a sizable long-term investment.
In Western Sydney in particular, there is a very big issue of housing shortages and low vacancy rates, sitting at 1.4%-1.5%. With this not predicted to change any time soon, and new developments taking longer than usual with the planning process holding up a lot of construction, smart investors are purchasing existing blocks of units and refurbishing them to control their capital expenditure.
If investors can guarantee long term leases and negotiate with tenants for regular increases over the rental period, investors will continue to get a strong income stream as inflation levels remain high. This will allow investors to have certainty with their income stream until they can take advantage of capital growth.
Childcare is a sector that is really strong – occupancy would have to be close to 100% because there is a demand for the purpose-built asset.
Demand for childcare comes from a couple of factors. Pre-school is now seen as a key requirement for children so there’s social and educational pressure, and to support this the government is offering significant subsidies to families which puts further demand on the industry. Looking at lifestyle factors, there is also a need for many Australians to send children to childcare if they are a dual working family as we shift back to pre-pandemic routines in 2023.
In addition, in this asset class tenants are not signing a two-year lease, they are signing over a 10-year lease so for owners there is certainty with income and commercial growth in their investment. With over 536 childcare investments currently in the pipeline across NSW, and land tax concessions for NSW, it’s a commercial asset that continues to outperform other asset classes.
Industrial spaces have also continued to prosper this year. Following on from our pandemic habits, Australians are completing most of their shopping online so warehousing has high demand. In addition, there have been numerous small businesses born out of the pandemic, and those who have succeeded have been the types of businesses expanding into industrial spaces.