Experts discuss small investment market

Hundreds of people tuned into the October edition of RWC Between the Lines webinar, where the panel of experts discussed the market for small investor stock.

Ray White head of research Vanessa Rader was joined by RWC Bayside principal Nathan Moore and RWC Glen Waverley principal Ryan Trickey.

Ms Rader said while commercial transaction volumes had declined, the smaller investor market, for transactions sub $10 million and especially sub $5 million, was still seeing a lot of activity.

She asked Mr Moore and Mr Trickey what trends they were seeing across industrial, retail, and office.

“Interest in the smaller industrial market is largely price point driven, we see a lot of strata products which transact close to $1 million. That’s a relatively affordable price point now for a lot of small businesses,” Mr Moore said.

“When you factor in the ability to leverage a self-managed super fund (SMSF), we’re seeing self occupation as a really big driver in that space.”

Contrary to that, Mr Trickey said as a result of regulation around SMSF he has seen a different partner.

“As a result of the cost and regulation involved at that price point, it really compresses the dollars that you get out of it, even for an owner occupier,” Mr Trickey said.

“We’re also seeing a divestment away from those residential assets at circa $1 million with people saying ‘hey what can we buy in the commercial space?’.

“Granted we have a bigger deposit threshold, however that deposit is often being generated by increased equity in their home or residential investment.

“So rolling it off into a simplified tilt slab low maintenance commercial asset has proven to generate that momentum that we’re seeing in the $1 million to $1.5 million space.

“So the two main things are that it’s too expensive to run a SMSF, but we are seeing money coming out of the residential market here in Victoria.”

With much of the industrial market experiencing high rents and low vacancies, Ms Rader asked if this was driving owner occupier demand.

“In Brisbane we were seeing market rents lift at 10 per cent per year which is a very significant increase. I think it put some fear in people and the only way to cap that moving forward is to buy the asset and control the occupancy costs.

“The second thing is the cost of a fit out now. If you can get trades, south east Queensland is under immense pressure with all the infrastructure projects going on, it’s expensive to do a fit out.

“So people are thinking if they have to spend $50,000-$200,000 on a fit out, they might as well do it in something that they own.”

Mr Trickey said investors were still active in the Melbourne market, as well as owner occupiers.

“I think Victoria remains an opportunistic state, especially with some of the pressure we’ve had from star government and interesting taxation challenges,” Mr Trickey said.

“We are still seeing interstate buyers. They see the market as something that has bottomed out, or is close to it, and are saying ‘that’s an opportunity’ and if you’ve got the money there is money to be made.

“We’re also seeing the owner occupier market play, the fit out costs and occupier costs is one thing, but the worst case scenario is that their business has nowhere to live. So buying somewhere gives them that security.”

Ms Rader said retail was still showing some strength in the post-covid environment.

“A lot of people discounted brick-and-mortar retail saying everything would go online, but we’ve seen a lot of shopping centres transact this year,” she said.

“Services and food-based retail are still going pretty well.”

She asked Mr Moore and Mr Trickey what trends they had seen in the smaller retail space, such as strip shops.

“A lot of strip shops are quasi-professional spaces as well, which has added some depth to that market,” Mr Moore said.

“There’s only so much main road frontage that’s available, so you’re not seeing massive expansion of that kind of product which is putting a cushion under values and putting a cushion under rents.

“Some of the really discretionary retail uses that popped up just after covid are under pressure at the moment, like takeaway food providers.

“A lot of the activity in that space is investor driven and, provided tenant demand can be demonstrated, they’re still transacting on a pretty good yield.”

Mr Trickey said the Glen Waverley area had a really strong retail market.

“It took a pounding for a period there, but we were fairly optimistic about the bounce back. The reinstatement of really good rents and good performing tenants happened really quickly,” he said.

“We break that category up into primary, secondary and tertiary. And when we look at our primary strips, their vacancy rates are lower than what we’ve seen in a long time.

“Our secondary retail like bike shops, gelato, Auspost, those strips are doing really well too, they’re assets in the $500,000 to $2 million range.

“Then you get into our tertiary retail and they’re our strips with maybe 5-8 shops with no anchor tenant, and they’re struggling. That’s due to the increased cost of living and goods.

“The quasi businesses who were doing okay because they were only paying $25,000 a year are now struggling because their rents have crept up and the costs of goods have crept up, but they haven’t got the foot traffic.”

The office market in south east Queensland has fared a lot better than the market in Melbourne over the last few years.

“We’ve had no discernable issue, our core market is 30 minutes out of the Brisbane CBD so it probably got stronger during the course of covid. When people were forced out of the CBD offices but they didn’t want to work at home, they looked for an intermediate facility,” Mr Moore said.

“There is a two-tier market appearing and a lot of that is surrounding disability compliance and availability of car parking on site. If those boxes can be ticked then the product is walking out the door.

“A lot of our product is ground level or two-storey so it has dual purpose, there could be retail on the ground floor and professional services above.”

Mr Trickey said the office market was a strange space in Melbourne at the moment.

“A lot of the smaller 100-250sqm spaces are on four or five year leases and they’re all just starting to come up now off the back of that challenging time,” he said.

“We’re now doing a lot more reviewing of those rents and trying to instil in owners that holding those tenants at a capped rent of a similar rent and to go into a rebuilding process.

“Because once you start talking about agent costs, marketing costs, legal costs, all of a sudden to go and see a 10-15 percent reduction in the face rent you’re getting, but you’ve enjoyed those increases over the last five years, it’s far more expensive to lose your tenant to get a low rent. It’s a real education piece at the moment.”

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Cassandra Glover | Media Advisor