After robust levels of turnover and rapid reductions of investment yields during much of 2020 and 2021, 2022 was also trading well but encountered challenges from the first upward interest rate movement in May. Now, seven rises later, many buyer groups have taken a break from commercial property investing while others ponder if now is really the right time to sell.
We have seen volumes fall away in the second half of 2022 and confidence levels dip broadly across the marketplace, while financing is still available, particularly from alternative financiers, the cost is such that yields have to increase. Despite this, there continues to be winners in 2022 with a range of savvy investors happy to capitalise on long term opportunities.
Industrial
In first place is industrial, which has been the golden asset class of the last few years. Demand has been growing off the back of logistics, distribution and transport, particularly last mile solutions, together with the growth in small business and local manufacturing. The increased demand by users, coupled with limited supply additions over the past few years, has resulted in vacancies across the country in the sub 1 per cent range, therefore, face rents have seen outstanding levels of increase. Furthermore, with little supply on the horizon and many markets hampered by tight available developable land, the future for land values appears favourable. While yields are unlikely to sustain their lows given the pure cost of finance, the longer term prospect of high occupancy and increased returns will see good results for industrial owners. Those assets well located on major transport nodes or with development potential are likely to continue to enjoy the benefits of this asset class in years to come.
Medical
In second place is medical assets. The medical asset class was gaining momentum well before COVID-19 hit, which shone a light on additional needs in pathology services, GPs and hospital facilities. The medical sector has been evolving over the years, once considered a segment which catered for the very young or very old, we are seeing greater medical needs across all demographics. Specialised services have grown in popularity across the once forgotten age group, particularly in sports medicine, preventative care, cosmetic services, as well as holistic or alternative medicines. With increased demand has come improvements in leasing rates and, with limited purpose built facilities, the readaptation of other assets such as retail to cater for the growing demand. Often secured by long leases with fixed increases, these assets are kept to a high standard given their medical use, which is attractive to the investor looking for a secure, growing income stream. While yields will see some movement off the lows achieved last year, the long term attraction of medical facilities cannot be underestimated particularly as our population continues to grow.
Childcare
In third place is childcare assets. Childcare has been one property type which has become attractive over the past few years. The “set and forget” nature of the asset assured investors a secure, long term income stream and its affordable price point making it attainable for a range of buyers. While yields have been at a low rate for a long time, there is expectation these will tick up given the increased cost of finance. Despite this, the increases in government subsidies anticipated will do much to further spur on this sector in terms of demand and likely growth in returns. Again, an asset class with high occupancy, assets which have the ability to be redeveloped or extended will benefit from an uplift in return with those well located in metropolitan areas likely to hold their value over regional assets. Remembering commercial property is a long term asset, the underlying land value for many childcare assets is another positive for this asset class.
