More than 400 people tuned in to listen to Ray White Commercial’s first Between the Lines Live webinar for 2023, as this month’s experts discussed what to expect from the commercial property sector during a changing market.
The webinar was hosted by Ray White head of research Vanessa Rader who was joined by Ray White Capital Transactions director Ian Hetherington.
The pair spoke about the future of commercial property during a time of growing interest rates and shifts in market fundamentals, and how to understand who the buyers and sellers are, and what are the opportunities and expectations on the state of the market this year.
Ray White Capital Transactions completed an off-market deal for a pair of eastern seaboard industrial properties worth $250 million at the end of 2022.
Ms Rader asked Mr Hetherington what opportunities he saw for the industrial sector in the next 12 months.
“The industrial sector is still looking pretty positive as there’s still strong rent growth coming through,” Mr Hetherington said.
“In 2023 the focus for sheds is going to be in the unit estates because you’ve got a number of tenants, you’ve got lease expiries where you can capture the inflation, and the effects of that rent growth. So I think that will be the preference and the stronger weighting of capital will be towards that sector.
“Your larger big boxes sheds that might have a 3 per cent rate of increase, when inflation is running at 7.8 per cent, it might not be as attractive as being able to capture that rent growth through the lease expiries through unit estates.”
Mr Hetherington said most of the investment was coming from offshore.
“There are still new entrants coming into the market, mainly American-based companies, so I think that trend will continue,” he said.
“Whether it be commercial, retail or industrial, if you’re looking for a holding in the Asia Pacific it’s much easier to get settled in Australia than it is in other markets such as Japan, South Korea, and China.
“Australia bats above its weight due to its transparency and its access, rather than other markets where socio-political issues may make it harder.”
With vacancy rates still up across many office markets, particularly Sydney and Melbourne, Ms Rader asked Mr Hetherington what he saw in the future for that market.
“Things look better in the volume of people going to work. Anecdotally this time last year the Sydney CBD was at about 20 per cent, and it looks like it’s gone to about 60 per cent, but dominated by Tuesday, Wednesday, and Thursday,” Mr Hetherington said.
“Net absorption is either flat or negative, but most leasing agents are walking around town with a smile on their faces which is to do with the fact that incentives have increased dramatically from where they were three years ago. A lot of businesses are taking advantage of that saying, let’s create a new environment to change it up and look at the way we work to try and attract people to come back to work.
“Flight to quality has been a big one, and also heritage buildings have had a strong focus. We’re speaking to more people than ever who are wanting to get set in a heritage building. It offers a different environment and it’s a way of attracting staff back.”
Given the increase in interest rates and high vacancies, Ms Rader asked Mr Hetherington who would be buying office buildings.
“The demand for office is down due to the uncertainty of the future of office,” he said.
“If we look back to when interest rates were at their lowest and borrowers were borrowing under 2 per cent, yields got down under circa 4 per cent. If you fast forward 18 months, that debt is probably between 5.5 and 6.5 per cent. That has a dramatic impact on returns.
“There are positives. The downturn is negative for some, and a great opportunity for others. It’s all about timing when that capital will come back into the market. The dollar is more valuable today than it was two years ago, so people are going to want to see that in their returns.
“The trend will stabilise and people will come back to work. So I think the outlook is positive. Post GFC I was shocked at how fast the market came back, it was a J-curve. I think with the amount of capital that’s around I can’t see why it won’t be a J-curve again.”
