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Investors are starting to question the tight yields being paid under the hammer as overconfident commercial property owners’ push up their price expectations, according to a Sydney auction and property expert.
Damien Cooley, managing director of Cooley Auctions, said the commercial property market in 2017 has “shown a lot of strength”, with the auction house reporting their clearance rate over the year at 64 per cent and $432.8 million of sales under their hammer – growing by 47 per cent from last year.
But Mr Cooley noticed these strong conditions were encouraging vendors to ask for more and buyers were “pulling back a little bit”.
“A lot of the buyers are getting a little bit more cautious on how tight they push these yields and buyers are just beginning to look for a little bit more value,” he said, adding that this wasn’t because of the auction method but “a result of owners wanting too much”.
“A lot of these owners are looking at pushing these yields just so tightly that something has to give.
“It’s not that they don’t want to buy them, it’s just that they don’t want to pay the prices in some cases that the owners are really looking at achieving.”
Investors were also looking closely at cash rates, which have been at a record low of 1.5 per cent for 16 consecutive months, to guide their next investment moves.
“People (buyers) are sort of saying ‘interests rates are incredibly low, how much longer are interest rates going to be around these levels?’”
But Michael Collins, from Cushman and Wakefield, believes interest rates will remain low in the short term, keeping demand for commercial investment properties strong.
“There’s no obvious sign interest rates are going to substantially increase in the near term,” he said.
“High-net-worth individuals are looking to derive an income and a return on their capital and they can’t get that from the bank anymore because interest rates have come down so far on deposit funds in the past four or five years.
“As interest rates have come down, commercial property yields have come down which has affected prices and these prices have gone up.”
Mr Cooley pointed out strong markets this year had been the industrial sector and properties with prominent tenants, such as banks and ASX-listed companies.
“We’re certainly going into 2018 with confidence,” he said.
Cooley Auctions’ 2017 data showed 65 per cent of commercial properties sold above the vendor’s expectation, fetching an average of $136,378 in excess of the reserve.
The auctioneer cited an industrial duplex, at 3 St James Place, Seven Hills, in Sydney’s west, which sold under his hammer in early December for $2.85 million, with an owner occupier paying $250,000 more than the reserve.
Development sites in the Double Bay area are another hot property market, according to Mr Cooley, but a cooling housing market is having an impact on the wider residential site market.
“It’s unbelievable how much that (Double Bay) market has changed in the last five years, how much more confidence and strength’s come into the market,” he said.
“The residential market continues to be put, to a certain degree, under a little bit of pressure.
“We’ll continue to see the residential development site market probably be under the same pressure and that’s just off the back of developers not being as confident in selling their properties off-the-plan as they were maybe 18 months ago.”