Commercial property deserves a closer look

IN Partnership with

Some parts of the commercial property market are doing well, and opportunities await enterprising brokers willing to learn a different type of real estate animal

COMMERCIAL PROPERTY is a varied market that behaves quite differently to its higher-profile cousin, residential property. Grim headlines are coming thick and fast now for residential property prices as the interest rate hiking cycle continues, but the changing economic dynamics have not affected commercial property in the same way. “Demand for industrial property, for example, continues to outstrip supply in practically all geographical locations across the country, with still-increasing demand for logistics warehouse space and inventory storage sites,” says Peter Vala, general manager partnerships and distribution at Thinktank. With rolling annual returns for industrial still just over 20% in the second quarter, this is helping to sustain prices for commercial land and buildings overall. Healthcare properties are also proving to be resilient performers.

Since 2006, leading property lending specialist Thinktank has provided over $5bn worth of commercial, residential and SMSF lending solutions, which has enabled thousands of borrowers to achieve their goals of acquisition, refinance and equity release. As an independent lender, Thinktank has also established a respected track record in capital markets, having issued over $2.5bn in AAA-rated bonds to Australian and global institutional investors to date. It has also recently introduced two mortgage-secured investment fund options for Australian wholesale and sophisticated investors.

Find out more

Peter Vala, Thinktank

Retail property, a subsector within the commercial ambit, is more of a mixed bag, with annual returns closer to 5% but well above the negative returns seen during the pandemic. This is partly due to new demographic behaviours. “Widespread adoption of flexible working practices [is] resulting in reduced foot traffic in many areas, especially in the CBD,” says Vala. Conversely, some retail property types are benefiting from the variable exodus of people out of central areas. Childcare-related properties remain in strong demand, as do professional suites and suburban strata offices as the economy adjusts to flexible working and people spend more time closer to home. Neighbourhood retail properties have enjoyed around 15% growth over the last year, with good recovery in capital growth.

Peter Vala, Thinktank

Another factor to consider in commercial is the steady growth in the number of people who prefer to transact online. The definition of commercial is wide and can include retail-like shops and restaurants, offices, industrial property, professional suites, as well as more specialised types of property such as student accommodation, boarding houses and car yards. Thinktank publishes a monthly report that tracks some of these markets in different Australian cities and provides some context on the direction of various property values. For example, the non-bank’s latest report in September shows that while residential is declining across all geographical areas surveyed, the reverse is currently true for industrial, with Sydney, Melbourne and Adelaide being standout performers. Retail properties are also performing well in Adelaide.

A more flexible approach Thinktank’s focus for commercial lending is on loans secured by property only, which may be either residential or commercial in nature. Assessing whether a commercial property is going to provide a good return or not depends on the type of property involved. “At this point in time, the main driver of total return for industrial property is the capital growth component, whilst for retail property it’s the income return,” says Vala. Other commercial subsectors currently highly reliant on capital growth include high-tech, warehouse, healthcare and distribution businesses.

Securing a loan for a commercial property often depends on the rental income to help service the loan facilities, with the length of time remaining in the lease being a key factor. Lenders will typically assess the viability of the prospect involved via the weighted average unexpired lease term (WAULT) or the weighted average lease expiry (WALE). This can be very limiting, especially if a lease is about to end. Thinktank takes a broader view when it comes to assessing the situation. “We aim to develop a good all-round understanding of the borrower, their various sources of income and the property being purchased, which means we do not get tied down by a WAULT or a WALE but instead take a more balanced, longer-term view,” says Vala. Just as non-banks have a flexible approach in the residential area, taking into account unusual income patterns or customers who may have suffered a ‘life event’ resulting in truncated paperwork, Thinktank can assess commercial loan applications with an amortisation period of up to 30 years.

News

Updates

Features

Resources

Events

RSS

Conditions of use

Privacy

Terms & Conditions

About us

People

Firms

Key Media

Mortgage Professional America

Which Mortgage

Canadian Mortgage Professional

Mortgage Professional Australia

News

Updates

Features

Resources

Events

News

Updates

Features

Resources

Events

“When residential lending opportunities are bit less frequent, chances are there are parts of the commercial property market performing well”

“The greater the range of lending solutions and property types a broker can support their client base with, the deeper the relationship will become and the more business opportunities will arise”

Some parts of the commercial property market are doing well, and opportunities await enterprising brokers who are willing to learn a different type of real estate animal

Some parts of the commercial property market are doing well, and opportunities await enterprising brokers willing to learn a different type of real estate animal

+20-25%

+10-15%

+5-10%

Regional retail, non-CBD office, CBD office, major retail

Total 1-year return for commercial property by subtype

Click on a button to see more

Property performance by type

Source: Thinktank Australian Real Estate Market Focus, Sept 2022

Sydney

Melbourne

Adelaide

Brisbane

Perth

residential (homes)

residential (units)

office

retail

industrial

weak/ declining

soft/ declining

weak/ declining

soft/ declining

fair/ stable

good/ stable

fair/ stable

weak/ stable

good/ stable

fair/ stable

strong/ improving

good/ improving

Structures and support When buying a commercial property for investment or to accommodate their own business operations, many purchasers elect or are professionally advised to establish a special-purpose company or trust to acquire the proposed asset. A lease is then usually entered into between this special-purpose vehicle (SPV) and the trading entity, so that if the property or business is sold or other circumstances change at a later date, the sale of one does not necessarily force the sale of the other. Separating the property from a trading entity can also provide an effective level of asset protection. More commercial properties are also being acquired under an SMSF structure for longer-term wealth management planning or to provide a higher level of protection for an asset. “We now see approximately 50% of commercial property purchases structured and financed this way,” says Vala. Sure, it can seem confusing to brokers who don’t know their WALEs from their SPVs. But the benefits of getting into commercial are obvious in an economy in which residential property in different areas may be a little fickle. “Developing more of a balanced portfolio across clients can help brokers offset declining asset types with stable or improving ones,” says Vala. “When residential lending opportunities are bit less frequent, chances are there are parts of the commercial property market performing well.”

By having a dedicated relationship manager every step of the way to help workshop, structure and guide the process through to settlement, Thinktank makes sure that brokers don’t get lost among the acronyms. “With the right support and guidance on hand, commercial property-secured loans are really no more demanding than a residential loan for a self-employed client,” says Vala. Having a commercial property arrow in the loan-products quiver will also help a broker diversify their business over the long term, allowing them to assist customers across a broader range of financial needs. “The greater the range of lending solutions and property types a broker can support their client base with, the deeper the relationship will become and the more business opportunities will arise,” says Vala.

Neighbourhood retail, subregional retail

Industrial, high-tech, warehouse, healthcare, distribution

+20-25%

+10-15%

+5-10%

Regional retail, non-CBD office, CBD office, major retail