The trend of investment diversification into emerging asset types has continued into 2017. Over the past five years there has been a strong push by many investors to move up the risk curve by investing in commercial assets which typically can be described as “non-core”. Investors are not seeing these assets as risky given their long term lease covenants, attractive conditions around maintenance and outgoings, which has resulted in considerable yield compression.
Assets such as Service Stations have historically been plagued by the expectation of contamination. However, their stable income stream has seen this segment of the market grow in appeal by a range of private investors such as high net worth investors, private syndicates and private super funds. Similarly fast food, stand alone supermarkets, bank branches all feature long term leases to multinational brands which gives a strong sense of longevity and security giving confidence to these investors to commit regardless of geographic location.
Low interest rates have further driven this investment resulting in high turnover levels particularly over the past three years. Despite interest rate increases (by banks independent of the RBA) together with tightening regulatory lending for some assets such as Service Stations has made the investment into these asset classes more challenging. However, the tight yields which have been achieved have not been dampened with demand exceeding supply in the current economic climate.