Chapter 1: What insights does Scott O'Neill share about commercial property investing?
It's The Real Estate Podcast brought to you by Ray White, the largest real estate and property group in Australasia. And welcome to another episode of The Real Estate Podcast. We're talking to Scott O'Neill from Rethink Investing. Welcome to The Real Estate Podcast, Scott. Thank you for having me. Mate, it's great to have you on.
And you're dealing in the residential investment property space and also the commercial property space. And when it comes to the commercial sector, particularly in investment, a lot of mum and dad investors especially just can't get their heads around sort of putting money into that sector, preferring to stay with the residential that they've come to know, love and sort of trust over the years.
And in many ways, commercial is that step into the unknown for these people. But at the same time, including commercial into someone's portfolio shouldn't really be seen as that scary Darth Vader proposition, should it?
No, but look, you're quite right. The big thing I find that holds a lot of people back is just the lack of knowledge. Compare that to residential. Everyone... has experience with a residential property, whether you've lived in one or rented one or bought one. It's a barbecue topic.
There's a lot more media attention on residential and commercial sort of look that like forgotten cousin in the background that quietly does its thing. And I think that's where the opportunity lays. Like there is a lot higher cashflow on offer. It's not as scary as you think. Once you actually get your head around
know what drives businesses into certain types of commercial properties even just understanding the three main asset classes which is office industrial and retail because even a novice investor will realize there might be different levels of risk in say office first industrial and understanding what the economy is doing at that point of time is is where there can be actually a lot more opportunity so they're the main reasons i see people
I guess, hold back from commercial, but that is changing. We're seeing there's a lot more education out there on commercial and just the high prices and the low yields that you're going to see in residential after all this growth they've had. It's going to push more investors to commercial just by default because they need better income.
And that trend has rapidly been happening over the last few years.
I think you actually raise a really good point there. The barbecue topic, everybody around the barbecue talking about residential. And then you might have one person that says, well, have you guys considered commercial? And then somebody would say, oh, no, no, you don't want to get into that office space. Somebody could sort of throw up a negativity when it comes to office.
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Chapter 2: Why do many investors hesitate to enter the commercial property market?
So of those three, how do you rate them in the commercial space?
Look, I never like to generalize, but you do have to generalize sometimes to start with. And look, we all know COVID, for example, has pushed more people out of the office. So if you're going to pick the weakest of the three right now, it would have to be office. But then again, you can't generalize.
Like office might include medical-based properties, the suburban office spaces where out in the suburbs, there might be just a small commercial building with some dentists and some mortgage brokers or real estate agencies, there's a lot of very good offers out there. But would you go buy up in a tower in the middle of COVID? Probably not. On the other side, you've got industrial.
Industrial is right now from coast to coast across Australia, probably the strongest subsector of the commercial market because all these businesses that have been forced to close their doors with COVID, they buy and store and sell a lot of their products online now. So this e-commerce boom actually contributes to tighter leasing markets for the actual industrial spaces.
And on top of that, build costs are going through the roof. So to build more of this stuff, it costs more. So there's actually quite rapid capital growth happening right now to the tune of over 15% per annum in some markets for industrial. On top of that, you're going to get, you know, five, six, you know, maybe even 7% net yield. So overall, the returns are fantastic in that space. But-
Like any asset, you don't generalize. All industrial is not great. All of it's not good or poor rather. The other one is retail. So, retail is a massive field. You could talk about supermarkets. That's essential service. But retail is also high-end shoe shops. You can't compare all retail in the same barrel as being a good or bad because there's just thousands of different businesses.
So I think there's this buzzword in the economy at the moment, like off the back of COVID around essential service. I like using this term called destination type tenants where you've got to go and see them to use your products. That business model is not dying. In fact, there can be a lot of resilience in that sector because tenants often pay a lot of money for their fit outs.
And these are the things as a commercial investor you want to look at. Is your tenant going to stay long term? And if they've just spent a lot of money on fitting their property out and they've got a five-year lease and they've got through COVID without issues, then that can be a really good asset.
But you can see there's different things to consider for different asset classes, but they're all not bad and they're all not good. That's where it gets a bit murky and sometimes an expert opinion is probably what you want rather than the barbecue topic opinions.
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Chapter 3: What are the main asset classes in commercial real estate?
And I shouldn't use that word, but it's more tenants that have performed resiliently through this process. And a lot of these industrial properties, they didn't have forced closures. Particularly if you're in markets like Queensland and WA, they barely had a proper lockdown in these areas.
So in the meantime, these businesses, which might be trade-related, online logistics-related or cold food storage-related, they shouldn't have really had a hiccup throughout this whole time. We see tenant legends over hundreds of properties every few months. And the amount of tenants claiming on large discounts is surprisingly little.
And that's probably just one of those things you've got to consider when you're investing. Sometimes the media can exaggerate certain points. But at the same time, there has been some speculation. weakness and you know to sort of tell you the office market in cbds there's been a lot of pain in those markets and same goes for some sub-sectors of retail like you you know i often talk about
How retail on highways are going where there's no car parking out the front. That's not a business model that's doing as well as it used to, especially when a lot of these products can be sold online. So you've got to consider the long-term trend beyond just what we've seen in the last two years as well.
And that's where things like the e-commerce boom, which marches on year after year, is something to consider what types of properties will benefit from that. It's almost like investing in stocks, commercial property. You've got to really think in terms of what businesses are going to do well. And that's where the opportunity is.
And the risk can be high, but the reward is certainly higher as well.
You know, I'm just thinking of something like a Perth. Would there be some great opportunities in the office space in Perth because of the way the pandemic has played out differently in Perth?
The answer to your question, there is, but there isn't been a large discount in square meter rates in Perth. Because interest rates are so low and office space is generally an area where you see a lot of institutional level investors play in. So, fund managers, large syndicates, you know, these are the guys buying up the whole office towers. they haven't been selling for discounts.
So we've seen square metre rates barely drop. If anything, there's been many markets over there, despite the huge vacancies they're having in those markets, increase in value. And like last time I checked last month, the vacancy rate of Perth was about one in seven buildings, one in eight buildings. offices, rather, were vacant. So it's a very high vacancy rate.
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Chapter 4: How has COVID-19 affected the commercial property landscape?
Commercial is no different. We're seeing very quick growth rates and cheap money and now there's a big flock of new or I guess residential investors, traditional residential investors now coming to commercial because they've kind of reached a yield limit where they can't keep investing in residential. And there are different lending rules in commercial.
And that's probably the other thing to note. If you run out of lending for residential, but you've got a deposit, you can actually keep lending in commercial because there's things called lease dock loans and no dock loans. And essentially, you can actually get a loan without even a job as long as you've got a cash deposit because the property is in commercial.
lend on themselves if they've got a good lease. So there's a lot of people taking advantage of that and especially with APRA jumping in like they did in 2018.
I can hear those mum and dad starting to have a conversation in the background, Scott, as we chat, starting to think, well, maybe we should look at some commercial property and add that into the portfolio. Hey, really good to chat. Thank you so much for coming on to the Real Estate Podcast.
I really appreciate your time and thank you very much. We connect you to the best real estate information across Australia. The Real Estate Podcast.
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