The tourism and industrial sectors have been the shining lights in what has been a rough year for commercial property, according to an expert.
Ray White Commercial Head of Research, Vanessa Rader, said industrial has been a star performer over the past 12 months, showing a 1 per cent increase, to bring total returns to 5 per cent this year, just behind tourism, which has yielded total returns of 5.3 per cent.
“Looking at total returns alone, the tourism sector and our uptick in occupancy and daily room rates for accommodation, coupled with increased domestic and international visitor nights, has seen this asset class reign supreme for 2023,” Ms Rader said.
She said medical has been a key area of investment interest this year, however, underlying pricing has seen capital growth slide backwards, bringing total returns to 2 per cent, the same rate as retail, to tie for third place.
“The challenges of the office market since COVID-19 have not improved, impacting vacancies, effective rents, incentives and yields making it the loser of 2023, recording declines in capital value of 9 per cent over the past 12 months,” Ms Rader said.
“These results are indicative of national averages, with some office markets outperforming the average, including Brisbane CBD, which saw total returns remaining in positive territory for this period, followed by Perth CBD, which recorded -0.8 per cent total returns.”
Ms Rader said despite the woes of the past year, commercial assets historically have been considered quality long-term investment options.
“The rapid rate of escalation over the last few years; spurred on by inexpensive and available finance together with the desire for large institutions, funds, and smaller private buyers to diversify their portfolios; is all part of the volatility that these assets recorded,” she said.
“Considering the longer term trends, industrial has cemented its number one position with both five and 10 year average returns outstripping all other asset types at 15.3 per cent and 13.9 per cent respectively.
“Over this longer term, the evolution of the industrial asset class has been outstanding.”
According to Ms Rader, industrial used to be considered a “dirty” asset, which held a discount to other asset classes, however, they have grown in sophistication and demand to occupy now outpaces supply.
In a similar fashion, the medical sector has been growing in popularity she said.
“Over the past 10 years, this asset class has enjoyed 13.6 per cent annual growth and will continue to perform well given our growing needs in this space, high population appreciation and an undersupply of quality offerings, ensuring medical as an institutional asset class is here to stay,” she said.
“While tourism has had a strong 12 months, this asset class has had to bear the negative results seen during COVID-19, and over the past five years growth has sat at just 2.9 per cent per annum.
“Although, over the longer term, tourism has outperformed other asset types with a 10-year average of 9.1 per cent, which is inline with retail.”
Ms Rader said retail similarly had greater difficulty during the pandemic period, resulting in a five-year average growth of just 1.2 per cent.
According to Ms Rader, office assets have been the worst performers this year, which continued a long-term trend.
“The difficulty over the past few years, regarding limited demand and high supply in some markets, has hindered the returns for this historically attractive commercial asset class,” she said.
“Both five and 10-year returns sit at a similar level of 5.8 per cent and 5.5 per cent respectively.
“Unfortunately, future expectations surrounding occupancy and investment demand may see further short term declines in total returns making the historic long term prospects for offices more difficult.
“Encouragingly we may see a resurgence in offshore, institutional and private activity capitalising revalued assets, while a strong movement by the private sector to bring staff back into our office assets could improve fundamentals in 2025 and beyond.”