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Despite global economic challenges and increased risks in commercial real estate, the Australian commercial property sector remains a low-risk option for investors, according to a credit bureau report.
The latest property market guide from credit reporting bureau CreditorWatch has cautioned that business conditions will be extremely challenging for several sectors, notably food and beverage and construction, but demand in the commercial sector is evident.
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The report, titled “Navigating the Stormy Seas of the Commercial Property Market”, acknowledged that asset classes within the Australian commercial property sector have experienced varying impacts due to the COVID-19 pandemic and the shifting economic landscape.
CreditorWatch’s chief executive Patrick Coghlan said high inflation and interest rates have caused business conditions to be extremely challenging for many sectors, in particular food and beverage and construction.
“For the office and retail sectors, stay-at-home restrictions emptied out office buildings and shopping centres, and continue to have some lingering negative impacts, particularly on the office sector,” Mr Coghlan said.
Office spaces in Sydney and Melbourne’s central business districts, in particular, face significant challenges due to increased vacancy rates, resulting from factors such as the completion of new buildings and evolving tenant needs.
As remote work becomes more common, with many employees working from home on certain days, physical vacancy rates exceed official data indications.
However, the report also noted that overall company profits are in remarkably good shape, with businesses broadly categorised within the retail and industrial sectors recording a 41 per cent increase in gross profits between June 2019 and June 2023, while businesses in the office sector reported a 13 per cent increase over the same period.
Strong population growth and recovering business confidence continued to support underlying demand in the commercial property sector, albeit at lower levels than pre-COVID-19 times, particularly in key areas like office space.
“For the industrial sector, however, the impact was enormously positive as online retailing boomed, causing demand for warehouse space to soar,” Mr Coghlan said.
Anneke Thompson, chief economist at CreditorWatch, noted that compared to the commercial property sector in other parts of the world, the Australian commercial property sector is arguably one of the lowest risk sectors for investors.
She explained that many properties in the privately owned segment of the commercial property sector are held within self-managed superannuation funds (SMSFs), which generally means lower gearing and reduced need for liquidity.
“While there are certainly some liquidity issues within the sector, with a number of institutional investors in unlisted funds seeking redemptions, the sector overall is in a reasonably healthy financial position,” Ms Thompson said.
Rental growth, which initially outperformed other commercial property sectors due to high demand for warehousing and distribution centres during COVID-19, is now receding, but still positive, making industrial property highly sought-after by commercial property owners.
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