Commercial Property Yields l Trilogy Funds

The Australian commercial property sector has been providing opportunities for investors seeking yield and potential for capital growth for many years. Today, it is being reshaped by global trends and events, creating new opportunities, so where can investors expect to find the best commercial property yields in 2022 and beyond? 

Broadly speaking, commercial property refers to any land and buildings used for business purposes. Yields on these assets are historically more consistent than those of residential real estate. This is in part because business tenants tend to sign longer leases that can include inflation-linked rental increases and often dictate the tenants bear some costs, such as council rates and insurance, that would otherwise be paid by landlords. 

Investors may seek exposure to the commercial property market in search of income and to diversify their investment portfolio. 

The three main classes of commercial property are office, retail and industrial, of which office has traditionally been the highest in total value in Australia.  But this is changing, and the total value of investment-grade office property in Australia is set to be overtaken by that of industrial space by 2026, while the value of investable retail property is likely to fall further behind both other classes, according to CBRE Research. 

These changes in the commercial property market are due to several factors. Demand for office space has softened in recent years because many employees who worked from home during the Covid-19 pandemic have not returned to the workplace, even though restrictions have eased. Capital city office occupancy as a percentage of pre-Covid levels is still around 50% or lower, Property Council of Australia data shows. 

In the retail space, online shopping continues to gain market share from bricks-and-mortar outlets such as shopping centres and high street stores. Online now constitutes around 20% of the total retail market and is growing at almost 20% a year 

Yet despite these trends, office and retail property can still offer compelling investment opportunities. For example, smaller suburban office developments are performing well relative to large office buildings in CBDs, as they offer tenants shorter commutes, more parking and less health risks from confined spaces such as lifts. ‘Green’, carbon-neutral office buildings are also at a premium with many commercial tenants. 

Likewise, many smaller neighbourhood and sub-regional shopping centres and other retail spaces are still in high demand by both shoppers and investors compared to some larger malls and CBD shopping precincts. 

Professional property fund managers offering commercial property trusts should have a deep understanding of these markets and the forces shaping them. Smaller investors can take advantage of their expertise by considering investment in commercial property via managed property trusts. 

Investors can buy units in trusts, which own a property or properties, and the trusts then aim to distribute the income they earn to their investors via regular payments called distributions. 

In practice, it can be difficult for small investors to participate in commercial property ownership in any other way than through vehicles such as property trusts, which pool the funds of many people to raise the large capital outlays required to purchase and manage multimillion-dollar assets such as office blocks, warehouse facilities and retail centres. 

Property trusts’ professional management teams operate the trusts’ assets with the goal of maximising long-term commercial property yields, which are determined by a wide range of factors including acquisition price, maintenance, tenant selection and management, vacancy rates, rental growth and lease incentives. Property trusts may also provide the opportunity for capital gains, when the eventual sale price is taken into consideration alongside those factors. 

Trilogy Funds oversees a wide range of commercial property trusts on behalf of thousands of investors. These include the Trilogy Industrial Property Trust, which currently owns 14 industrial properties across Australia*, as well as smaller single-property trusts such as the Milton Office Trust and the Cannon Hill Office Trust. 

Our Head of Lending and Property Assets, Clinton Arentz, says Trilogy Funds closely monitors commercial property markets to keep pace with the changing investment environment and identify the best opportunities to maximise current commercial property yields. 

While he expects the strongly growing industrial property sector to continue to outperform for some time to come, he is also optimistic about the longer-term prospects for the office market. 

“Industrial rents are still on the rise, with vacancies at all-time lows and demand continuing to outstrip supply, particularly in the capital cities,’’ says Clinton. 

“Although demand within the office sector is not currently as strong, we are seeing a growing move of people back to the workplace, which I believe will continue. 

“While many employees seek the ability to work from home, there are cultural and social benefits from working in the office, and for the younger generations, those who are starting out in their careers, being with other people in a group environment like the office will always be an important way to learn from more experienced colleagues.’’ 

In a report on the future of Australia’s CBDs, PwC predicts they will remain vital centres of commerce with much to offer businesses requiring office space. 

“The CBD isn’t dying – it’s just changing form,” PwC says. “As CBD tenants embrace flexible working, city centres are becoming increasingly attractive to a new wave of businesses.” 

Clinton agrees. “There’s a real vibrancy to the Brisbane CBD recently, we’ve also seen this in Sydney and things are starting to pick up in Melbourne too,’’ he says. 

“There will always be a need for places where people can work together, and quality office spaces will continue to provide long-term value for both tenants and investors.’’ 

 

* As at 31 May 2022 

This article is issued by Trilogy Funds Management Limited ABN 59 080 383 679 AFSL 261425 (Trilogy Funds) as responsible entity for the management investment schemes mentioned in this article. Application for investment can only be made on the application form accompanying the relevant Product Disclosure Statement (PDS) and by considering the Target Market Determination (TMD) available at www.trilogyfunds.com.au. The PDS contain full details of the terms and conditions of investment and should be read in full, particularly the risk section prior to lodging any application or making a further investment, together with the TMD. All investments, including those with Trilogy Funds, involve risk which can lead to loss of part or all of your capital or diminished returns. Trilogy Funds is licensed to provide only general financial product advice about its products and therefore recommends you seek personal advice on the suitability of this investment to your objectives, financial situation and needs from a licensed financial adviser. Investments with Trilogy are not bank deposits and are not government guaranteed. Past performance is not a reliable indicator of future performance.