The love for real estate is written into the Australian psyche. However, with the continuous fall of home prices accompanied by policy questions over tax incentives and less availability credit, is the love for residential property investment over? If so, what does this mean for commercial real estate?
Commercial and residential real estate have crucial differences which provide investors with opportunities to exploit at different points in the cycle.
One difference rapidly emerging is valuations. The residential sector appears to be in a prolonged downturn in pricing as tighter lending standards and elevated apartment supply levels continue to bite. On the other hand, the commercial sectors of retail, office and industrial continue to have strong valuations as investors extend allocation of more capital.
There are critical reasons for the divergence between residential and commercial performance. ASX-listed real estate carry an average of 30% debt on their balance sheets versus the 70%-plus for residential. This points to commercial assets employing much lower levels of debt.
The other significant difference is income yields. Real estate in office, industrial and retail markets typically averages 5-7% income yields over a cycle. In contrast, residential real estate typically delivers less than 3% income yields where investors tend to look for more capital growth.
The demand for commercial real estate is expected to rise in the near-to-medium term as a result of falling home prices.
Image and article source: https://www.realcommercial.com.au/news/why-commercial-property-could-be-the-smarter-play
Ray White’s top 10 listings for April: (Click on the address to view listing)
Level 6, 27 Macquarie Place SYDNEY
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Level 10, 23 O'Connell Street SYDNEY
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Level 1, 107 Pitt Street SYDNEY
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Level 4, 387 George Street SYDNEY