The last year has marked a significant period of change for Australia’s economy and investment markets as we’ve grappled with the impact of rising interest rates and the long-term repercussions of the COVID-19 pandemic.
Despite challenges to some sectors, commercial property has continued to hold significant appeal as an investment asset, with its income-producing potential and diverse asset offering continuing to draw the attention of investors.
In the article below, I consider whether investing in commercial property in Australia is a good idea in 2023, as well as the key trends I believe will shape commercial property investment opportunities in the period ahead.
I also discuss the personal factors I believe every investor should consider in deciding whether investing in commercial property is a good idea for them personally.
Key trends driving commercial property investment in 2023
In Australia, the commercial property market has experienced significant shifts over the past few years, largely driven by changes in consumer behaviour, remote working arrangements, and the ongoing impacts of the COVID-19 pandemic.
As we know, however, commercial property is a very diverse asset class that covers a broad range of industries and asset types. While some of these sectors have faced significant challenges, others have continued to offer compelling investment opportunities, with some even benefitting from the acceleration of industry trends.
This diverse nature is why it’s critical to understand the specific niches and market influences impacting individual commercial sectors when considering which commercial property assets might make a good investment.
There are several trends I believe will shape commercial property investment opportunities in the year ahead and position some sectors more attractively than others.
Westbridge Diversified Fund No.4, third asset
Non-discretionary sectors will hold key appeal
While industries such as CBD retail have struggled under the move towards remote working, it’s been a very different story for non-discretionary assets such as neighbourhood shopping centres.
These centres focus on essential goods and services, and therefore tend to experience demand from consumers regardless of economic cycles – something which holds inevitable advantages in the current economic environment.
Similarly, over the past 12 years, Australia’s medical sector has experienced compound annual spending growth of 5.3%, driven by significant government investment and sustained demand from our ageing population.
Like non-discretionary retail, most of these medical assets offer an essential service, again positioning them as attractive investments despite economic fluctuations.
Value-add assets a popular option in inflationary environment
Given the current economic environment, commercial assets that provide a hedge against inflation – whether through rent reviews linked to the Consumer Price Index (CPI) or value-add opportunities – will hold strong appeal as an investment.
As an example, the industrial/logistics space has benefited from significant growth in recent years, supported by the shift to online shopping and the need for more space on the part of businesses to store back-up inventory.
This high demand, combined with a chronic shortage of supply, has presented a unique opportunity for investors and fund managers to capitalise on resulting increases in rents, particularly where assets are under-rented and/or have repositioning potential.
This is a strategy we have employed at Westbridge through both our Industrial Total Return Fund and our Total Return Fund, the latter of which is targeting value-add opportunities across various commercial asset classes which we believe hold growth potential.
Opportunities for counter-cyclical investment
In recent years, many companies have adopted remote and flexible working policies – a shift that was accelerated rapidly by the COVID-19 pandemic. Consequently, demand for office space dwindled, with office assets swiftly falling out of favour with investors.
However, with occupancy rates rebounding in certain markets, we are beginning to see compelling counter-cyclical investment opportunities in the office space, underpinned by solid yields and opportunities to purchase below replacement values.
That being said, the office sector is still a market to approach with caution. While data from the Property Council of Australia shows occupancy rates have reached as high as 80% in cities like Perth, larger cities such as Melbourne have struggled to draw workers back into the CBD, resulting in occupancy levels below 60%.
So, while there are opportunities for the right properties and locations, it will remain vital to be carefully selective in which assets stack up.
Determining if commercial property is a good idea for you
While there are certainly compelling trends that continue to position commercial assets as an attractive investment, it’s important to remember that commercial property isn’t for everyone.
Whether and how you invest in commercial property is dependent on your individual investment strategy, and there are several important factors I believe you need to consider when determining whether commercial property is right for your own portfolio.
1. Your investment goals
The first factor you need to consider is what you want to achieve from your property portfolio.
Commercial property can generate both passive income and potential for capital growth, but different types of assets and investments will have different focuses and return potential.
For example, a commercial property or fund with great value-add or development potential may present strong capital growth prospects. However, if your key objective is cashflow, then you may be better suited to a commercial property investment that focuses on delivering regular income through longer leases and a diversified asset base.
Equally, if you’re looking for an investment where you can leverage equity to continue building your property portfolio, then commercial property and property funds in general may not be the right option for you at this stage of your property journey.
2. Your risk appetite
Your appetite for risk can play a key role in determining which asset types are right for you.
Value-add investments will often carry higher risk in return for increased ROI potential.
While this can be appealing to investors with a higher risk tolerance or those in the growth phase of their property portfolio, they may not be suitable if you are more risk averse and seeking a steady, income-producing investment.
Westbridge Industrial Total Return, first asset
3. How much liquidity do you need from your investments?
Commercial property is often liked by investors due to its ability to generate regular income returns and its potential for capital growth over the longer-term.
However, like many property assets, it isn’t as liquid as investments such as shares which you can trade in and out of at any time – especially when investing in a property fund with a fixed-term.
Of course, there are benefits to this in terms of reduced volatility and passive income, but you also have to be comfortable with this being a longer-term investment without ready access to your investment capital during that term.
The bottom line
As you can see, determining whether commercial property is a good investment isn’t as straightforward as simply assessing one market.
One of the unique benefits of commercial property is its diverse nature, and the ability to spread or target your investments towards the sectors you believe offer the strongest potential.
This is also why many property investors will opt to gain exposure to the commercial market through property funds as opposed to directly, with the former often enabling greater levels of diversification through their lower entry requirements.
Above all, however, it’s important to consider whether commercial property aligns with your investment goals and what you personally need from your wealth portfolio.
Westbridge Funds Management is an Australian real estate investment company that provides investors with access to commercial and residential property investment opportunities through unlisted property funds. To be notified of future investment opportunities with Westbridge, complete the form below to join our priority mailing list:
