Investors seeking higher yields should consider emerging opportunities in the Sydney commercial property market, writes Richard Sheppard.
Investors who typically focus on residential property have some thinking to do. A new report from BIS Shrapnel predicts that Sydney office rents will rise 90 percent between now and the end of 2018. Net gross rents are expected to rise by about 30 percent during that period. This is a phenomenal prediction when you compare it to the best forecast for residential property – a gain of about 7% during the next three years. While this takes into account rental increases, not property values, the value of commercial property is highly correlated to its yield. Even if growth is not as high as BIS Shrapnel expects, investors in Sydney offices can target returns four to five times higher than residential property.
Why is Sydney office space so valuable?
Land values have risen dramatically in recent years and vacancy rates are plummeting because of a shortage of supply caused by the conversion of many city offices into apartments. The acquisition of large tracts of office space to accommodate the new Sydney Metro is another factor. With power in the hands of landlords, rents are soaring. BIS Shrapnel expects net gross rents to increase from an average of $890 per sqm to $1200 per sqm by December 2018. In addition, leasing incentives for tenants (such as assistance with fit outs) are starting to dry up because of demand for offices. As with any investments, of course, there are risks. The commercial property market is more complex than the residential sector, while there is the long-term prospect that vacancy rates could rise. There may also be special conditions with some commercial property loans, so you need to choose lenders carefully. However, the strength of the forecast is a wake-up call for investors. The chance is especially attractive for investors in their 40s and 50s with a lot of equity in the property who want to get higher yields. Before making any financial commitments, it is wise to seek advice from experienced property advisers or buyers’ agents. But don’t just ignore this news – the numbers really do stack up.
This article was originally written for the October 2016 edition of Peninsula Living Magazine.