NOW IS THE TIME TO INVEST IN COMMERCIAL PROPERTY

A veteran real estate analyst is urging investors to seize opportunities in commercial property, predicting a surge in values across various sectors. CBRE’s Head of Research, Sameer Chopra, believes it’s an “amazing time to buy real estate” despite market uncertainties. He said rapid population growth, high construction costs, and forecasts for significant interest rate cuts will provide a strong tailwind to the sector.

Mr Chopra points to Australia’s recent population boom, with over one million new arrivals in three years, as a major catalyst for demand across all property types. This influx is expected to necessitate substantial commercial development, including logistics spaces, retail centres, offices, hotels, and hospitals.

“We are feeling this demand in the residential market, but it’s going to spread its wings,” Mr Chopra said. The analyst highlights that construction costs have risen by 30 per cent, making it challenging to build new assets at current valuations. This dynamic is expected to increase the value of existing properties, particularly those near new infrastructure developments.

Mr Chopra predicts a significant easing cycle in interest rates, predicting between eight to ten cuts by 2026. This could lower the cash rate to between 1.85 and 2.35 per cent.

“We need to change the conversation from, ‘Are they going to cut interest rates this year?’ to ‘How many interest rate cuts will there be in the cycle?’,” he said. While some experts consider Mr Chopra’s interest rate forecast optimistic, there is agreement that commercial property investment opportunities exist for selective buyers.

Mr Chopra remains bullish on various commercial sectors, noting that CBD office visitation has rebounded to 75 per cent of pre-pandemic levels and expects return-to-office concerns to dissipate by next year.

In retail, Mr Chopra has turned positive following significant rent resets during the pandemic. He cites positive re-leasing spreads and low vacancy rates as encouraging signs for the sector.

The student accommodation market also presents significant growth potential, according to Mr Chopra. He suggests the Australian market could expand tenfold before reaching the bed-to-student ratios seen in countries like the US and UK.

FOREIGN INVESTORS DOMINATE COMMERCIAL PROPERTY MARKET

Investment in Australia’s commercial property market surged in the second quarter of 2024, with foreign investors leading the charge in major office acquisitions. 

According to JLL Research, investment into office, retail, and industrial markets topped $7 billion in Q2 2024, marking a 60% increase from Q1 and doubling the figures from the same timeframe last year.

The office and industrial sectors were the primary drivers, accounting for 80% of the total investment. Office sales rebounded strongly, reaching $2.7 billion, while industrial investments hit $3 billion.

JLL’s Head of Capital Markets for Australia and New Zealand, Luke Billiau, said the jump in sales partly reflected ongoing appetite for industrial assets and more price discovery in the office sector.

“We’re encouraged by the activity in the first half and that it reflects the start of a rebound in capital markets activity,” Mr Billiau said.

Foreign investors made a significant comeback, spending $2.8 billion in the first half of 2024, nearly matching their total investment for the entire year of 2023. This surge resulted in offshore buyers taking the largest share of Australian commercial property market sales. 

JLL Research estimates that foreign investors have accounted for 24% of total investment sales to date in 2024, up from a low of 16% in 2023. However, this figure remains below the 10-year average of 32%.

Private capital also played a major role, contributing $2.25 billion to deal volumes, followed by superannuation funds at $1.96 billion. 

Mr Billiau highlighted that commercial property sales in the first half were driven by Australian listed and unlisted funds divesting assets. “We need to start getting comfortable with uncertainty,” he said.

“The global macro environment certainly still has some challenges that are weighing on investors. Still, risks are being priced in and more groups are starting to look to Australia for stability, growth and interesting investment opportunities.”

Looking ahead, JLL estimates approximately $28 billion in total volume for 2024, a significant increase from $19.4 billion in 2023 and approaching the long-term average of around $31 billion.

While retail investment was subdued in the first half of 2024, the outlook remains positive. Mr Billiau noted a change in institutional sentiment towards the sector and a pipeline of transactions that could contribute to increased volume in the second half of the year.

ONLINE RETAIL SLOWDOWN IMPACTS INDUSTRIAL PROPERTY OUTLOOK

The rapid growth in online retail sales during the pandemic has plateaued, potentially affecting demand for industrial property.

Ray White Head of Research, Vanessa Rader, said the proportion of online retail sales has remained static over the past 18 months, raising questions about future demand for industrial facilities.

“The growth trajectory of online shopping has paused, with consumers returning to brick-and-mortar stores, particularly for food and groceries,” Ms Rader said.

Online transactions now account for 10.9 per cent of all retail sales across the country, down from 15 per cent during the COVID peak.

The industrial property sector was a standout performer during the pandemic, with large distribution facilities attracting significant institutional investment. Over $9 billion in industrial assets changed hands in the year to March 2022, leading to fierce competition and sharp declines in investment yields.

However, the landscape is now changing, with advancements in technology potentially impacting space requirements. “AI-driven efficiencies, multi-level racking systems optimising space, and increased automation suggest that additional capacity could be absorbed within existing industrial footprints,” Ms Rader said.

The past 18 months have seen a slowdown in large industrial transactions, with changing financing costs contributing to rising yields and some land value declines across the country. “Despite persistently low vacancies, rents have levelled off, and new supply has been limited due to high construction costs further dampening investment demand,” she said.

Ms Rader suggested these developments could signal a significant shift in the industrial property landscape. “As logistics demand potentially wanes, the status of large distribution facilities may shift,” she said.

The renewed preference for brick-and-mortar shopping could bring stock back to stores, potentially energising retail assets across the country. This shift in consumer behaviour and technological advancements may reshape the industrial property sector, with investors and developers adapting to changing market dynamics.

FIVE BENEFITS OF ASSET FINANCE FOR AUSTRALIAN MANUFACTURERS

Asset finance is a powerful tool that allows manufacturing businesses to acquire essential equipment and technology without large upfront costs. Here are five key benefits of asset finance for manufacturers in Australia:

Improved cash flow management

Asset finance enables manufacturers to preserve their working capital by spreading the cost of equipment over time. Instead of making a large lump-sum payment, businesses can make manageable monthly instalments. This approach frees up cash for other critical areas such as:

• Marketing 
• Research and development
• Expansion and hiring
• Day-to-day operational expenses

By maintaining a healthier cash flow, manufacturers can better manage their finances and seize growth opportunities without compromising their liquidity.

Enhanced productivity and efficiency

Access to the latest equipment and technology is crucial for manufacturers to stay competitive. Asset finance makes it possible to acquire state-of-the-art machinery that can significantly boost productivity. This can lead to:

• Increased production output
• Improved product quality
• Reduced waste and operational costs
• Faster turnaround times

By leveraging asset finance, manufacturers can continually upgrade their equipment, ensuring they remain at the forefront of technological advancements in their industry.

Reduced business risk

Investing in new equipment always carries some level of risk. Asset finance helps mitigate these risks in several ways:

• Protection against obsolescence: Regular upgrades keep your equipment current
• Flexible terms: Align repayments with your business cycles and cash flow
• Potential tax benefits: Interest payments may be tax-deductible (consult your accountant)
• Preserved credit lines: Keep other credit facilities available for unexpected needs

This risk reduction allows manufacturers to focus on their core business activities with greater confidence and financial stability.

Increased access to capital

Traditional bank loans can be challenging to secure, especially for smaller or newer manufacturing businesses. Asset finance provides an alternative route to capital, often with less stringent requirements. This increased access to funds can be crucial for:

• Startups looking to establish operations
• Small to medium-sized manufacturers aiming to scale up
• Businesses with limited credit history or collateral

Asset finance can bridge the gap between a manufacturer’s ambitions and their current financial capabilities, enabling growth that might otherwise be out of reach.

Tailored financing solutions

One of the most significant advantages of asset finance is its flexibility. Lenders can create customised financing packages that align with a manufacturer’s specific needs and circumstances. This customisation can include:

• Varied loan terms to match equipment lifespan or cash flow patterns
• Seasonal payment structures for businesses with cyclical demand
• Balloon payment options to reduce regular instalments
• Inclusion of soft costs like installation or training in the finance package

This flexibility ensures that the financing solution complements the manufacturer’s business model and strategic objectives, rather than forcing the business to adapt to rigid loan terms.

MITIGATING RISKS IN DEBTOR FINANCE

Debtor finance offers a great way for businesses to better manage their cash flow. But like anything, it also comes with some risk. Fortunately, there are some things you can do to help reduce them.

Evaluate customer creditworthiness

The first step in mitigating risks is to thoroughly assess the creditworthiness of your customers. This involves conducting detailed credit checks and evaluating their payment history. Use credit reporting agencies to obtain insights into their financial health and payment behaviour. By doing so, you can identify customers who may pose a higher risk of default. Implementing stringent credit assessment processes helps reduce the likelihood of financing invoices from unreliable clients, protecting your business from potential bad debts.

Monitor outstanding invoices

Effective management of your accounts receivable is essential. Regularly review your outstanding invoices and track payment status. Implement a systematic approach for following up on overdue invoices to ensure timely collection. It’s a good idea to use automated invoicing and payment tracking systems to help streamline this process. Promptly addressing overdue payments reduces the risk of prolonged cash flow issues and helps maintain a healthy financial position.

Diversify your customer base

Relying heavily on a small number of customers can be risky. If one or more of these key customers experience financial difficulties or delay payments, it can significantly impact your cash flow. To mitigate this risk, focus on diversifying your customer base. By spreading your credit exposure across a broader range of clients, you reduce the impact of any single customer defaulting. Building a diverse customer portfolio not only minimises risk but also enhances business stability.

Set clear credit terms

Clearly defined credit terms are vital for managing debtor finance risks. Ensure that your credit terms, including payment deadlines and penalties for late payments, are well-communicated to your customers. Transparent credit terms set clear expectations and provide a basis for enforcing payment agreements. Additionally, regularly review and update your credit policies to adapt to changing market conditions and customer behaviours.

Maintain communication

Maintaining open lines of communication with your clients and your debtor finance provider is crucial. Regularly update your provider on any changes in your customer’s credit status or payment behaviour. Effective communication ensures that all parties are informed and can respond proactively to potential issues.