Commercial property is a real estate asset that is used for business activities. Commercial property usually refers to buildings that house businesses, but can also refer to land used to generate a profit, as well as large residential rental properties.

Commercial property has traditionally been seen as a sound investment. Initial investment costs for the building and costs associated with customisation for tenants are higher than residential real estate. However, rental yields are usually higher (5%-8% for commercial vs 2%-4% for residential).

There are different types of commercial properties, and below we list these out in detail.

Retail property

The economy has broadly returned to pre-Covid trends across all states and territories, which is reflected by the number of employed people and the size and growth of GDP. Despite lockdowns and restrictions in all capital cities, the retail trade has broadly returned to normality.

Examining in detail the retail categories, we find that revenue for the two largest contributors, including cafes, restaurants and takeaway and department stores have returned to the long-term trends or pre-Covid levels.

Changing consumer habits are impacting brick-and-mortar retailers and shopping centres. In 2017, apparel retailers held the biggest occupancy share of sub-regional shopping centres. However, more and more consumers seem to be migrating to online shopping with the Australian retail e-commerce market share forecast to continue to increase. Along with this, shopping habits and behaviours following the coronavirus pandemic will also influence how and where consumers will purchase their goods. This may result in increasing vacancies in the retail sector in the short to medium term.

The official stats does not distinguish between digital and physical retails. Since the start of the pandemic, digital retail has increased significantly, which is reflected by the volume of parcels delivered and the increasing popularity of food delivery platforms.

Due to the lock-downs and reduced trades for most of the months in 2020 and 2021, the rent (as well as prices) has declined across the major capital cities:

• Sydney:-16.5%

• Melbourne: -22.5%

• Brisbane: -11%

• Perth: -13%

• Adelaide: Stable

• Canberra: Stable

We project that a regional-to-city migration trend will continue, coupled with the mass arrivals of students, tourists and immigrants will increase the foot traffic and the demand for brick and mortar retail space.

In conclusion, there is a window of opportunity in the next 6-12 months to acquire retail properties at discounted prices in Sydney, Melbourne and Brisbane. We project retail property value will grow by 5-10% in the next 12-24 months.

Industrial property

One of the key underlying demand for industrial property is the general economic activities. The average yield has declined by 0.5% compared to Q1, 2020 across all capital cities. This is due to the decline of rent, and the increase of industrial property value. In fact, the value has increased on average by 10% across all capital cities. This is relatively comparable with the residential properties.

There is a marked difference in the behaviour of retail and industrial: retail has declined in rent and value; while industrial value has increased; and yield has declined quite moderately. We hypothesize that this is due to the fundamental change in the economic landscape: the digital economy has become more prevalent than ever, which requires warehousing; while brick and mortar retail has shrunk in size.

Looking into the future, the demand for industrial property will continue to increase thanks to the rapid adoption of the digital economy post-pandemic.

Growth in this segment is closely related to the increasing demand for warehouse space from online retailers and e-commerce platforms. Mega warehouses, automated facilities, and logistics hubs are needed to expand Australia’s e-commerce fulfilment capabilities. Online retail giant Amazon along with grocery chains Coles and Woolworths are just a few of the names that are looking to occupy more industrial space. DHL and Australia Post are also increasing their postal and delivery facility occupancy.

• Sydney—as of Q1, 2021, 680,000 sqm or a growth of 6% of industrial supply was added to the Sydney market, most of it was in the outer west and outer southwest

• Melbourne—approximately 127,925 sqm of industrial supply hit the market in Q1 2021, up 56% from Q1 2020.

• Brisbane—newly completed supply in Q1 2021 was measured at 102,774sqm, a slight drop from the previous quarter. Supply levels are expected to drop in 2021, although this could change as developers may look to spec more projects.

• Perth—19,360 sqm of new industrial floorspace was completed over the March quarter, up 5.9% from the year prior.

• Adelaide—186,741 sqm of new supply is forecast to be completed in South Australia in Q1 2021.

In conclusion, the Industrial property asset is projected to grow moderately in the next 6-24 months, thanks to increasing demand for industrial space as the economy will return to normality and the increasing appetite for online shopping. The entry price may range from a few hundred thousand for storage or small workshop to a few million for warehouses.

Office property

The vacancy rate remains substantially high across the capital cities: 8.5% in Sydney, 8.2% in Melbourne and 12% in Brisbane. Net Face Rent remains steady in Q1, 2021 in comparison with 2020 and 2019. However, the landlords offered heavy incentives during 2020 and 2021, which reduced the net effective rent by 2.5% in Q1, 2021 in comparison to Q4, 2020. In comparison to Q1, 2020, net effective rent has significantly declined by 15% across all capital cities.

The projected supply of office space, which was in pipeline a few years before the pandemic, will flood the market in 2020-21-22, making the competition for tenants to be tough.

Declining rental yield, coupled with uncertainty in the timing of border opening and more flexible working arrangements, will likely see office properties to be flattened in the foreseeable future.

The vacancy rate in Perth and Adelaide is 13%, which remains at the same level as in the last 2 years.

The ACT market remains strong despite the pandemic, which is largely due to the composition of tenants who are mainly backed by government agencies or large corporations.

In conclusion, we project that the office property asset will not perform well in the next few years, due to the adaption of more flexible working arrangements, the high vacancy rate in major capital cities, and new office supply that was planned a few years ago. Therefore, we do not recommend investing in this asset unless there is an exceptional opportunity.

Comparison

Major cities

Regional cities

City

Significant developments and projects

Sunshine coast

Development of Australia's only greenfield city centre within an existing urban area at Maroochydore.

Expansion of Sunshine Coast Airport to deliver direct access from more Australian and international destinations.

One of the largest health infrastructure precincts being developed in Australia at the 17 hectare Health Precinct adjacent to a new A$1.8 billion tertiary teaching hospital campus.

Major new residential and commercial developments and precincts across the region including the Caloundra South Priority Development Area (Aura), which will house around 50,000 people.

A business, technology and retail precinct adjacent to the University of the Sunshine Coast, one of Australia's top-ranking universities.

Delivery of international broadband submarine cable infrastructure to provide the east coast of Australia with an alternative entry point for its international data connectivity.

Newcastle

A project to allow direct flights between Newcastle and countries including the United States, China, Singapore, Russia, Japan and South Africa, as well as the transformation of Broadmeadow into a truly international sporting, residential and entertainment precinct, have been acknowledged as projects of national significance by the Federal Government’s infrastructure advisor.

Source: https://www.newcastle.nsw.gov.au/council/news/latest-news/newcastle-projects-identified-as-nationally-signif

Wollongong

No significant projects

Geelong

Tourism infrastructure projects along the Great Ocean Road, including for the Shipwreck Coast and other key locations along the Great Ocean Road, to strengthen the region as a leading tourist destination and ensure benefits flow to local communities.

Construction of the Geelong Convention and Exhibition Centre, to help drive the visitor economy in Geelong and generate new investment and development in the city centre.

Public realm improvements under the Revitalising Central Geelong Action Plan, to help establish a vibrant city centre and reinforce Geelong’s position as the gateway to the region.

A new ferry terminal at Queenscliff to improve services across Port Phillip Bay to Sorrento.

Road upgrades at Deakin University’s Geelong Future Economy Precinct to unlock new jobs and businesses and improve access at the site.

Completion of the Geelong Waterfront Safe Harbour project to support tourism, community activities and major events.

Source: https://www.infrastructure.gov.au/cities/city-deals/geelong/

Gold Coast

Health and Knowledge Precinct | $5 billion

Southport CBD Rejuvenation | $5 billion

M1 Pacific Highway Upgrade | $1 billion

The Star Broadbeach Island Masterplan | $2 billion

Gold Coast Light Rail | $1.6 Billion

Gold Coast Airport Expansion | $500 million

The Spit Masterplan | $205 million

Ocean-side Cruise Ship Terminal | $463 million

Home of The Arts Precinct | $118 million

Source: https://www.mosaicproperty.com.au/insights/gold-coast-2020-major-infrastructure-round-up/

Central Coast

No significant projects

Western Sydney

The population of Western Sydney will grow by almost 1 million people (or 46%) over the next 20 years. The region will continue to grow faster than Sydney as a whole; by 2031, Western Sydney will be home to 50% of the capital city's population, up from 47% in 2011.

Significant projects are:

• The new Sydney airport

• The Metropolis development

• The Bradfield new CBD