Small-scale investors driving uplift in Perth commercial property

Private investors are driving a resurgence in industrial assets in Western Australia, enticed by strong income-producing opportunities in logistics properties, service stations, medical clinics and childcare centres.

Research from Ray White Commercial showed there were $1.148 billion in commercial property transactions in WA in the 2020-21 financial year, a slight uptick on the previous year and a contrast to other states which experienced slowdowns in sales due to pandemic-related lockdowns. 

Ray White head of research Vanessa Rader said that with demand for stock in excess of what is available to the market, some investors had moved up the risk curve in terms of quality and location.

“While several larger institutional deals were completed this year with sale prices in excess of $50 million, the average sale price recorded during 2020/21 was just $1.125 million, highlighting the dominance of the private investor,” Ms Rader said.

Speaking to Australian Property Investor Magazine, Ms Rader said industrial properties had been the asset class of choice, showing the greatest resilience over the COVID period with the large uptick in e-commerce and emergence of new small businesses.

“Demand has been strong for any income-producing assets, particularly with longer and more secure lease covenants, including assets such as service stations, medical clinics, and childcare centres,” Ms Rader said.

“We have noticed demand strongest in the sub-$5million price point.

“Mum and dad investors are prevalent, as interest rates are low and there may be greater yield opportunities in speculating into commercial, but we also have more sophisticated private buyers in the market, both local and from interstate, again seeking out these quality, income-producing assets.”

Office jockeys for position

Perth still has the highest vacancy rate of major cities in Australia, but with the relatively limited number of lockdowns compared to the rest of the country, it is now the only CBD market with a falling rate.

The vacancy rate is down from a high of 20.2 per cent in the first three months of the year, and close to pre-pandemic levels of 19.6 per cent in early 2020.

Even more encouragingly, the real Perth CBD office vacancy rate is closer to 15 per cent, when the level of static vacancy and buildings that are about to be withdrawn from the market are taken into account.

JLL Research said it expects the imminent removal of four A-Grade buildings, as they undergo refurbishment or redevelopment and totalling about 40,000 sqm, will reduce the vacancy rate to approximately 18 per cent.

Nick Van Helden, WA Head of Office Leasing said demand is continuing to improve with JLL’s monthly tenant inspection numbers back to pre-pandemic levels.

“We are seeing a gradual increase in deal flow with tenants taking advantage of the value proposition, quality of stock and demand for centralisation as the CBD continues to attract new tenants from the suburbs,” Mr Van Helden said.

“Perth’s sub-lease vacancy has also remained relatively stable in comparison to other national CBD office markets. 

“Very few companies have decreased their footprint, primarily due to the strength of the WA economy and the way the State has managed the health response.

“We are also seeing high levels of staff back working from the office rather than home.”

Pressures remain

Changing lifestyle and work arrangements continue to have an effect on office and retail property markets, while the booming resources sector is not necessarily translating into more office taking up office space and buying from CBD shops.

Ray White’s Ms Rader said work from home arrangements were still impacting office space requirements but argued WA was closer to a normal situation than the east coast.

“Office vacancy rates are returning to pre-pandemic levels and workers’ absences may not be as long lived as we initially thought,” she said. 

“Retail, however, is a bit different; food and services are the areas of growth in the retail market, but a reduction in clothing and other goods has seen vacancies increase somewhat in some locations and this will hit rents and could hinder capital values in the future.  

“However, we are pleased to see such a great take-up of retail spaces in other locations, and even the creative use of space for office, medical or childcare uses to take up otherwise vacant spaces.”

A recent report in The Australian said one of Perth’s biggest city office employers, Woodside Petroleum, is considering slashing hundreds of jobs despite the buoyancy of the resources sector.

The company is targeting cost savings of 30 per cent from its operations over the next three years, setting the scene for a major cull of its workforce.

This hasn’t deterred Australian real estate investment trust Dexus investing $339 million for a 49 per cent stake in a holding unit trust which owns Capital Square Tower 1, which was built in 2018 to house Woodside’s headquarters.

Resources-related tenants account for 37 per cent of the overall Perth office tenancy, while professional services represent 33 per cent.

Optimism reigns

Ray White’s report concluded that WA would continue to be the driving force behind the positive national economic story.

“The increased interest from interstate buyers, local investors and offshore groups who are looking to capitalise on this positive momentum, is set to continue into the new financial year,” Mr Rader said.

“We are seeing interstate investors capitalising on the quality results seen in WA, with strong economic fundamentals the key hook from east coast buyers looking for more affordable options or opportunities across all asset classes.  

“International has been a little more difficult but still occurs, notably from Asia, in the higher price point.”.

Ray White Commercial WA director Chris Matthews said WA was poised for greater commercial growth if the pandemic was kept at bay.

“Low interest rates have fuelled much of this investment, while the growing residential prices in Perth have seen many investors switch to industrial as an alternative,” he said.

Supermarket-anchored centres continued to be in strong demand by investors, he said.

“Of course, the tourism industry was also greatly affected in the last financial year and only $64.7 million in hotel assets has changed hands, including pubs, but Ray White expects to see a rebound in activity levels in coming years.”