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Commercial investments vary in price considerably, and for new entrants the affordability of these properties with solid rental returns were quickly realised, causing a large uptick in investment activity. However, as interest rates started their upward movement last year, we were quick to see many buyers, in particular mum and dad investors and first time buyers, exit the market, leaving more experienced buyers behind.
This has had a significant impact on volumes with results from Q1 2023 highlighting a 60.8 per cent decline in asset sales in the sub-$2 million price point compared with the same period in 2022. Q1 2022, however, was the peak of activity, with this period recording $3.06 billion in sales up from Q1 2021, where activity started to ramp up as interest rates bottomed out, recording $2.64 billion in the quarter. 2021 overall was a busy year for this smaller investment class as buyers flocked from across the country, eager to pursue assets regardless of borders with income growth potential in particular in the industrial market.
For the first quarter this year, there has been $1.99 billion in commercial sales completed in the sub-$2 million price range. While this is down on the prior two years, it still represents close to 2,000 transactions across the country. New South Wales remains the most active asset class to invest in, with both volume and number of sales ahead of Victoria. These two states have always been the premier market for small investors, with Queensland coming in next. However this year there’s been some change, as activity in South Australia has taken out third position for the first time ever, off the back of increases in the medical and childcare space. Queensland garnered good results over the past few years as buyers looked to the sunshine state due to its strong interstate migration and limited lockdowns keeping businesses open, compared with the southern eastern states.
This was similar for Western Australia. During the past two years, this market recorded a strong increase in activity - notably from interstate buyers speculating in the robust economy of Western Australia despite stringent border controls.
However, the affordability which was discovered during these last few years in markets such as South Australia, Tasmania and ACT, has grown enquiry levels and, as a result, activity in these markets remain elevated compared to pre-COVID-19 results.
Buyers continue to actively seek out industrial assets in the current environment given the high occupancy and strong gains in rental growth over the past couple of years. Owner occupiers also are active in this segment of the market - small businesses looking to shelter from the uncertainties in accommodation costs, purchasing via their SMSF keeping activity levels up despite the growing interest rate environment. Industrial continues to be the most active asset class to invest in, it has represented approximately 44 per cent of the total turnover for the last three years and remains the number one choice for buyers at this smaller price point. Office and retail historically have been attractive investments, smaller strata office suites or retail space, and freehold strip retail dominating this price range. With changing retail conditions and working from home hampering the broader office market, activity has softened a little for these assets with many buyers more selective and the reduced urgency in the marketplace pressuring price.
The sectors of the market which have grown over the last few years and continue to be in demand are various alternative assets, these are income generating investments with long, quality leases in place often referred to as “set and forget”. Service station activity has been overtaken by the demand for childcare and medical facilities while fast food also remains an investor favourite. The hotel and tourism sector has also had a busy few years, while there are limited opportunities in this price point; regional motels and pubs have seen an uptick in activity, and similarly, caravan park properties.
One of the major changes we’ve seen in results this quarter compared to the same period in 2022 and 2021 is the reduction in activity in regional markets. The rush to purchase over the last few years saw many buyers move up the risk curve to secure an asset as competition grew, often looking not just interstate but to regional markets where affordability was greater. This trend has declined with those buyers in the market at the moment being more thoughtful and selective with their investment purchase which is likely a trend to remain for the medium term.
