Industrial and Commercial Market Commentary
There presently is some uncertainty in the current industrial and commercial property market. The financial market has seen significant turbulence over the last few years, resulting in severe liquidity shortages. Lenders have sought to both reduce leverage and to shift to low risk assets. Some uncertainty evolves from artificially low interest rates. The Official Cash Rate is currently at 2.5%, with Government indicating this level is not sustainable in the medium to long term, and likely to increase end 2011–2012. Importantly, there has been a large differential occurring between first tier, prime real estate and that of second tier properties which are either poorly located, in poor condition, vacant or with short average weighted lease terms, or occupied with modest quality tenant covenant. Capitalisation rates for prime, first tier properties, particularly those in the small to medium size investment bracket have remained relatively firm. In contrast, older second tier properties or those with shorter, weighted average lease terms or vacant, have shown a shift in capitalisation rates as values are compressed, largely due to the risk now being factored in by potential purchasers. This may see the return of double digit yields.
The current low bank deposit rates in the vicinity of 4.0% – 5.0%, has led to some shift by some investors from safe deposit investments back into prime real estate, however investors are very focused on quality of tenant and lease covenant. We have seen a narrowing band of blue chip tenants being now more or less trading banks, government departments, infrastructure companies, and global fast food restaurant operators, whereas in the past some franchised national organisations were also seen as blue chip, these are now losing some of their shine.
Overall, the market may be best described as uncertain, and although some economists and optimists are indicating that we are nearing the turn of the property cycle, we are mindful that it may be some time until tenants businesses are back to operating in the black and prosperous enough to induce the growth required to increase demand for commercial and industrial real estate.