BETWEEN THE LINES - Western Australia Commercial Investment Activity Financial Year Review July 2021


BETWEEN THE LINES - Western Australia Commercial  Investment Activity Financial Year Review July 2021

It was a difficult start to the financial year for the Australian economy, concerns for COVID-19 remain heightened despite cases dissipating and most staff having returned to work. While there were good results for WA the sentiment remained difficult on the East Coast with many staff still working from home and border closures restricting travel. Soon the second wave of cases from Victoria would hit putting a firm hold on the border controls for WA however the local economy continued to perform well compared to all other states.

For the commercial property market, greater certainty emerged with tenants again occupying premises and businesses up and running, now with low interest rates the quest for private buyers to diversify and invest in higher yielding investments saw a swift growth in demand both from local and interstate investors. With initial economic uncertainty remaining high we saw many owners opt to “wait and see” with limited quality stock coming onto the market keeping volume levels down. 

As time passed, we witnessed growing demand for stock however downward pressure on yields which aided in encouraging vendors to the market albeit at a slow pace. Subsequent lockdowns in January and April did little to stifle the building demand for stock from buyers across the country who continue to enquire and look to transact across WA despite the stringent border measures.

WA TRANSACTION VOLUME  - Office Market 

During the 2020/21 financial year we have recorded $1.029 billion in transactions across Office assets, while this is down 46.02% on the prior year it remains in line with the historic average. 

Last financial year we saw significantly larger CBD transactions take place in late 2019 and into 2020 prior to COVID-19 propping up this result. 

This year we have seen a continued interest in the office market from foreign buyer groups while local syndicates and investors have also actively pursed these assets despite the uncertainty anticipated for the office market. CBD and West Perth vacancies saw an increase to rates during the year putting a halt to the positive momentum recorded in 2019, however as staff rapidly returned to work, vibrancy returned to our centres and sentiment across the office markets have improved. 

We have seen many private investors and owner occupiers making their first foray into commercial property with a high volume of sub $1 million office suite sales across both CBD and suburban locations. Smaller freehold assets have also been hotly contested as interstate buyers vie for quality yielding investment options with future upside potential.

WA TRANSACTION VOLUME - Industrial Market 

Industrial assets have been the standout performer nationally during this pandemic period. The growth in interest by small business (owner occupiers), private investors both local and interstate have driven up capital values in some regions while new lows in yields have been recorded

Over this 12-month period we have recorded $1.148 billion in sales transactions, 1.39% up on last year’s results. With demand for stock in excess of what is available to the market we have witnessed some investors move 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. 

Low interest rates have fuelled much of this investment, while the growing residential prices in Perth have seen many traditional residential investors investigate industrial as an alternative, notably at this lower price point.

WA TRANSACTION VOLUME - Retail Market  

Retail assets have been the worst affected commercial asset type during the COVID-19 pandemic. Forced lockdowns and restrictions on trade saw many retailers fold during 2020 leaving large vacancies in both retail centres and local neighbourhood strips

While we are seeing new businesses slowly filling these spaces, rents have seen adjustment in some areas while the mix of tenancies we see in centres have changed as clothing & soft goods retailers make way for more food, services and experienced based retailing. 

This financial year we have only recorded $485.8million in retail sales, well below the rates achieved last year (albeit this included a $1 billion+ shopping centre sale). Despite the woes of the retail market and the uptick in online trade (aiding the industrial market), we have seen interest however in tenanted investments setting new yield benchmarks depending on the quality of the lease covenant as well as smaller convenience-based retail centres. 

Supermarket anchored centres continue to be in strong demand by investors across the country as we see many owners repositioning their assets and attracting tenants such as medical and childcare into vacancies which is an attractive drawcard in the current market.

WA TRANSACTION VOLUME Hotel & Leisure Market

The tourism market has been a difficult one across the country, with no international visitors and strict border closures seeing a dramatic decline in both tourist and corporate travel keeping occupancy levels well behind rates ever seen before

This year has been a difficult time to transact a hotel asset with only $64.7 million changing hands including pubs which have seen some resurgence in activity as COVID restrictions eased. Foreign interest remains high for these assets with several transactions occurring on the East Coast, albeit at yields higher than prior years. 

Looking ahead we expect to see a rebound in activity levels in the coming years as occupancy levels continue to grow. Encouragingly, the border closures have resulted in an uptick in interest in visiting regional parts of the state increasing occupancy and average daily room rates for these assets. Properties in these regions have sparked interest of interstate buyers looking for a foothold in the safe haven state of WA and the growing drive holiday segment

WA TRANSACTION VOLUME Development Sites  

The development market has been a little subdued in recent years as residential prices were pressured down, however as the economy continues to drive forward, we have seen significant growth across the residential market which is anticipated to spur on development activity

This financial year we have recorded $128.2 million in development site sales, up 30.41% on the prior year with potential for sales to once again return to highs previously achieved. While the international border closures have seen foreign student numbers disappear as well as international migration, WA has enjoyed a swift increase in interstate migration. 

The safe haven status of WA during this pandemic has not gone unnoticed by the eastern states with Sydney and Melbourne losing record numbers of their population to both Queensland and WA. This growing population trend is expected to continue which will increase the need for housing across the state, pressuring this segment of the market again together with the planning system which will need to swiftly deliver a variety of accommodation options over the coming years

WA TRANSACTION VOLUME Medical/Childcare

The medical and childcare sectors were identified several years ago as a growing commercial asset class offering quality premises with stable income returns

A combination of an aging population, an increase in sports, cosmetic and alternative medicines and a mini baby boom growing the need for medical facilities across all age groups and segments. These facilities have become highly sought after due to the investment tenants make to keep the premises to the required high health and safety standards and the often- above market rents achieved, making them an ideal long term, tenanted investment asset. 

Similarly, childcare offers the same certainty of income often secured on long, multi-option terms, this has resulted in demand levels increasing and investment yields dramatically falling. This financial year we have recorded $53.0million in sales, well below that of prior years as there has been a significant reduction in stock coming to market. Typically purchased by private investors, we have seen these buyers move up the risk curve in terms of location, with the gap between yields achieved in metropolitan and regional locations narrow.

Western Australia continues to be the driving force behind the positive national economic story. Strong levels of GSP has impacted employment, new business starts and residential values favourably putting it on the radar for commercial property investors. 

We have seen the increase in interest from interstate buyers, local investors and off shore groups who look to capitalise on this positive momentum. With GSP levels expected to continue to grow into the medium term we expect greater focus to be on the WA market’s notably the industrial, office and alternative sectors such as medical and childcare, while the rapid need for increased housing is likely to fuel growth also in the development site sector. 

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