Commercial property is king, says Young Rich buyer’s agent
Demand for residential assets among individual property investors has “fallen off a cliff”, according to buyers agent and Financial Review Young Rich Lister Scott O’Neill.
Rethink Investing, the buyer’s agency that O’Neill and wife Mina launched in 2014, works with clients who have $25 million or less to spend on a deal. Those clients are increasingly demanding industrial and commercial assets, according to Mr O’Neill, who now buys about 35 properties a month on their behalf.
“The yields in resi have just gotten too low, and it will get harder to raise rents to keep up with borrowing costs as policies change,” he said, pointing to proposals for residential rent controls from the state governments of Victoria and Queensland.
“All the capital city housing rental yields still have a ‘3’ of ‘4’ in front of them, and to us it doesn’t make a lot of sense to go in at a yield lower than the average home loan rate, unless you’re a cash buyer betting on capital growth.”
Rethink has achieved an average net yield of 6.46 per cent on the $760 million of property it has bought for clients in the past 12 months, according to Mr O’Neill. The biggest factor keeping the yield of its purchases on par with commercial borrowing rates is its focus on commercial properties outside Melbourne and Sydney, despite the latter being the O’Neills’ home town.
“We’re doing lots of little shops, medical centres, dental clinics, childcare centres in Adelaide, Brisbane, Hobart and Perth, and also major regional centres like Newcastle, Townsville and Launceston,” Mr O’Neill said.
Rethink started as a specialist in residential property, employing the same strategy of searching for undervalued areas which Scott, 36, and Mina, 35, had devised for their own investment property portfolio from 2009 onward. However, by 2017, market opportunity had led commercial property to be 50 per cent of Rethink’s business, and it is now 95 per cent.
Mr O’Neill said many of the tenants in the type of commercial properties favoured by Rethink wanted to sign 15-year leases with annual increases linked to the consumer price index, delivering an income security that he said was still highly prized among mum-and-dad investors.
“You just need to be prepared to look outside your backyard, although I did buy a supermarket in [inner-southern Sydney suburb] Waterloo on a 6.1 per cent yield the other day, so it can be done.”
While the average net yields for industrial property nationwide are slightly lower at just over 5 per cent, Mr O’Neill’s clients are still keen on sheds and warehouses because they believe the rent increases on offer will more than make up the shortfall.
“Australia has the tightest industrial market in the developed world – CBRE reckons the vacancy rate nationally is 0.6 per cent – and the rental growth has gone crazy,” he said.
Industrial rents are up an average 24.9 per cent over the past 12 months, and though Mr O’Neill expected that growth rate to reduce over the next year, he expected it to remain elevated.
”They’re still not building enough new industrial property because build costs have gone up 50 per cent since COVID and developers have been holding off until growth picks up to the point where profit margins come back into the frame,” he said.
“It will take a long time for supply to catch up.”
The opposite is the case for office blocks in the capital city CBDs, whose valuations Mr O’Neill said still had far to fall.
“You’ve had yield expansion in CBD prime offices from 5.05 per cent to 5.62 per cent in the past year, or an 11 per cent decrease in value if rents remained the same, which is nothing when interest rates have risen as much as they have,” he said.
“You’re going to see a much bigger impact as owners are forced to transact.”
The poor sentiment had flowed through to the suburban and regional mid-rises, which were once a mainstay of Rethink’s business, although Mr O’Neill predicted they would regain popularity fastest.
“Prestige is not the factor it once was, it’s all about convenience and flexibility,” he said.
“Bosses are starting to see the value in cheaper space that is probably closer to where a lot of their staff work.”
However, Mr O’Neill said a countercyclical case for guiding clients toward offices again would not arise until national CBD vacancy rates fell below 10 per cent from 14.3 per cent now.
“But there’s no doubt offices will recover, at least a bit,” he said. “You’ve seen some of the big banks saying ‘come back in’, and let’s not forget that there’ll be 1.2 million migrants arriving in Australia over the next five years – and plenty of them will end up sitting at a desk in a city.”
The O’Neills occasionally buy properties themselves which, for whatever reason, were not taken up by the clients they identified them for. That portfolio, together with the value of Rethink which now employs more than 50 people, will see the couple return to the Young Rich List, which will be published in AFR Magazine on October 27, with an $80 million net worth.