Chapter 1: What is the focus of this episode on commercial property?
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And welcome to another episode of the Real Estate Breakfast, available on iHeartRadio every morning and also on Spotify and Apple and wherever you get your podcasts from. Thursday morning, tomorrow Friday, where's the week gone, eh? The 13th day for October for 2022.
Coming up in just a moment, we're going to have a look at commercial property and why commercial property seems to be defying the real estate market. Scott O'Neill, fresh back from Greece, is here from Rethink Investing, and he's going to be talking all of that through.
Well, last week we were talking about the affordability report that was released by Demographia International and just how bad the housing affordability in Australia is, which is amongst the worst in the world, with Sydney ranked the second least affordable city. Not a flattering look. Melbourne, Adelaide, Brisbane and Perth, they're not far behind for affordability.
And the numbers get a little bit worse when you look at the latest census data, which tells us that 67% of Australians own their home in 2021. And for people between the ages of 30 to 34, the numbers are getting worse with just 50% of people owning their home in 2021. Now, if you compare that back from 1971, it was much better, right? with 64% in that age bracket owning their home.
So the Aussie dream of home ownership is getting more and more difficult. We know that, but that's not to say give up.
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Chapter 2: How does commercial property defy current market trends?
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Chapter 3: What insights does Scott O'Neill provide about the commercial property market?
Well, what is happening with the commercial property space? It's been a few weeks since we checked in and took the pulse on this. We know that there's a lot of trading that is going on. How is the market going in October? Well, let's find out with Scott O'Neill from Rethink Investing. And good morning, Scott. Welcome back to the Real Estate Podcast. G'day, Craig. Good to be back.
You are back in the office today in Sydney there. Nice little breakaway in Greece, feeling re-energised?
Yeah, back to reality. It was a good three and a half months off, but it was a working holiday. Still do the mornings over there in Greek time, but good to be back. It's pretty rubbish weather though in Sydney, so adjusting, that's for sure.
Chapter 4: Which asset classes are performing well in commercial property?
Yeah, well, it's not as if you've got a long, long way to go before your next break. I mean, this is quite cunning, isn't it? Arriving back in October, a few more months and you're off again.
Yeah, it's a good time to lock some stuff in and get some good deals if they're out there.
Now, we're going to check in on the commercial property space in just a moment. But before we get there, I wanted to ask you what the general feel was when you were in Greece regarding this whole Ukraine war.
Look, interestingly, they didn't. It is in the background, but like there's more talk of things like the energy crisis coming out of Germany and that because there's a lot of German tourists that come into Greece. So yeah, I think maybe a few months ago when the war was a little bit fresher, it was a bit more fear around, but it's not what you'd think because they are quite close to it all.
But I don't think the same would be said for some of those countries closer.
Yes, the energy crisis is certainly there on most countries' radars, that is for sure. So let's have a look at the commercial property. Why is it at the moment commercial property defying the national market trend? Or is it defying the national trend? A lot of people might be saying, I need to know a little bit more information around this area.
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Chapter 5: What factors contribute to the current demand for commercial properties?
So perhaps throw up a couple of reasons why, Scott, that commercial property is defying, bucking the national trend.
Yeah, it's a good question, Craig. I stumbled across this little table on ThinkTank. So they're a lending mortgage company or bank rather, and they've got this nice neat table that sort of breaks down residential homes, units, office, retail, and industrial.
So you've got five different asset classes, call it, and it clearly shows the residential for houses and units declining in every major capital city in Australia. Interesting. for every major capital city. Retail, stable as well. And industrial, improving. So it's literally going the opposite direction to residential at the moment. So there is a very stark difference between them all.
And the reason for that is it comes down just to the supply demand of each. And we've seen a huge slump up in demand for residential, mostly in investors and owner occupiers due to their lending capacities being reduced. That's causing price falls in all these cities.
Chapter 6: How has the pandemic influenced office space demand?
But that's not been seen to the same level in the office or retail markets because the demand is so much higher versus the supply on the ground. So there's just not many properties for sale. And residential, We're seeing stock levels increase a lot. So that's contributing to giving the remaining investors and home buyers a lot of options to choose from.
And they're going to be more negotiable when they're to get a buyer. That's not the trend in commercial. Industrial, the one that's improving, that's just going from strength to strength. There is an actual massive shortage of these properties. CBRE rates the vacancy rate for industrial properties is 0.8% in Australia, which makes it the tightest leasing market in the world for industrial.
So you can see there's a lot of strength in certain subsectors of the market.
You know, somebody listening in might say, gee, I'm really surprised that the office space is performing so well, particularly with working from home. So what do you say to any potential investor looking at that office space?
Well, it's coming off a low base, Craig. So there's good deals out there.
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Chapter 7: What advice does Scott O'Neill give to potential investors?
But at the end of the day, a lot of the sellers are very cashed up super funds and people with hundreds of millions of dollars. They don't just sell assets because there's a slight bump in the vacancy. And the vacancies are dropping right now. They roughly doubled. They were sort of around 6%, 7%. vacancy rates and they got into double digits due to COVID.
They're retreating now because people are going back to the office. There's going to be a future decrease in the vacancy rates too as they let more people in the country. Immigration is going to push people particularly to Sydney, Melbourne, Brisbane and a lot of them are going to work desk jobs and this is going to squeeze the current market. The other side is build costs are going up.
So, to supply new buildings, it's going to be more difficult in future. So, rising population, less building, that's going to contribute to a tighter vacancy rate. So, the long-term investor who's spending money in office space, they don't look through all these media headlines and saying offices are dead because it's just an overstatement. And a smart investor knows that.
Chapter 8: Why is now a good time to invest in commercial property?
And there's also subsectors of the office market that are going very well, like suburban office where people are preferring to work closer to home. So if anything, vacancy rates have dropped.
So again, there's markets within markets, but overall, that's the reason it's not dropping because you've got a non-desperate seller selling to another long-term investor and they value the investment and they'll pay the proper market value for it.
Okay, so there's a couple of really good indicators. There's some points that you're making about why commercial property is defying the national market trend. There'll be people that will be listening to the podcast right now saying, well, I might just wait until after Christmas. We're on that trajectory now towards the end of the year.
What do you say to somebody right now if they're thinking, I'll leave it until 2023?
Yeah, another good question, Craig. I think it always depends on someone's individual circumstance. But if you're buying a positively geared asset, that means when you buy it, you are going to be making money each month holding it. These aren't negatively geared.
So unless you think you're going to get it at a substantially cheaper price in six months' time, that would be the only reason I'd say wait. But if you've got the money available and ready to go... your best off window shopping, seeing what deals you can get. Because if you wait six months or 12 months, you're going to be on the fence with a lot of other investors.
And the reason people would wait, I can see their logic. They want to wait to see how high the interest rates go, or they want to see when it starts coming back down again. And none of us know when that exact date is. And it might be six months, it might be 12 months time. But the minute those rates stabilize, you're going to see half those fence sitters come back into the market.
The other half are probably going to come back into the market when the rates start dropping. At that point, you're going to be paying more for the asset because you're competing against all these new buyers. So the other side is sellers are going to be less reluctant or more reluctant, should I say, to sell the asset at that time as well.
So you kind of want to buy when you think it's not perfect because you're going to get a better deal. Now, so I don't think you're going to get a massively discounted price by waiting. Plus, you're going to lose the cash flow in the meantime. I'll put my money where my mouth is. I've recently purchased again and I had the same thoughts. I thought, should I wait? And I came to this conclusion.
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