Commercial property on the upswing

Investors in property would do well to reweight their investment portfolio to commercial rather than retail property, says research house BIS Shrapnel.

BIS says the commercial property market is presently in an upswing which should make it strong for the next five to six years. BIS senior property analyst Maria Lee says in this time, commercial property should outperform the normally more-reliable retail property market.

“The commercial property market tends to have very long cycles in which rent can go up a lot and value can go up a lot,” Lee says.

“The cycles are about 17 to 18 years from peak to peak. Sydney had a mini-boom in the late 1990s, while in other capital cities where the commercial property market is oversupplied, it is now recovering which means rents are growing and vacancies are diminishing.”

Lee adds that the time lags in between commercial property swings are longer. As demand starts to recover, space gets tight, rent goes up, and then there is a wave of building. But the downside is that while there can be surging upswings, the downswings can be just as dramatic, which could scare off investors wary of risk.

In the retail market on the other hand, volatility is lower and returns from income are compromised by a much weaker capacity to increase capital value given the much higher expenditure on the property. Retail property investments typically target shopping centres.

“Essentially people spend lots of money keeping the property up to date and keeping it attractive to consumers. It’s a very competitive market place and must keep up with the newer centres being constructed.”

As a long term bet, retail property is expected to be more favourable to investors than the commercial property market. But while it might be safer for investors, it does not enjoy the cyclical trends of the commercial market.

“Over a 10 year period, retail property will probably have slightly higher returns,” Lee says.

“The issue now is anticipating the upswing in the commercial market, and we believe that investors can get extra value by taking advantage of this.”

But Lee admits that convincing investors might be a challenge. The decision to reweight their property investment portfolio in favour of the commercial sector could be perceived as being at the risk of selling out of the retail sector and being shut out of it when the value of it rises at a later date.