With the cash rate at just 1 per cent, and possibly heading lower, yield hungry investors like Sydney mortgage broker Paul Miles are shunning residential investments for the higher returns offered in commercial property.
Mr Miles, is one of about 20 investors who have bought strata industrial units off the plan in a new development in Strathfield South in the inner west being undertaken by Primewest Development.
“I’m hoping for a net return of between 6 and 7 per cent. In residential you’re lucky to get a gross return of 3 per cent,” he told The Australian Financial Review.
With four residential investments already in his portfolio, Mr Miles said he was looking at buying another four industrial properties this year.
He paid just $450,000 for the 130-square-metre warehouse and office and expects to have secured a tenant before he settles on the property mid-next year when the Interlink Strathfield industrial estate is due to be completed.
“Everyone should always be looking for capital gain but I was more interested in the yields that industrial attracts. Our plan is to pay off the asset within five years and live off the rent – it becomes a cash flow-positive asset,” he said.
Mr Miles, who specialises in arranging commercial finance for his clients, said he was not worried about an asset bubble.
“That’s only something to worry about if you plan to sell. My strategy is to buy and keep. As long as I getting a strong yield, I’m not concerned.”
About 40 of the 88 units in the development on the corner on Cosgrove Road and Cleveland Street in Strathfield South have sold off the plan so far this year, generating $35 million in sales for Primewest Development, a business backed by the John Bond-led property syndicator Primewest.
“These sales are at about a 50:50 split, between owner-occupiers and investors, which indicates investors such as Paul are being geared towards industrial assets over residential or other investments, which is a good sign for Sydney’s industrial property market,” said Rob Thomas, a director at Primewest Development.
Mr Thomas said off-the-plan buyers were “not your typical mum-and-dad investors”.
“These kinds of opportunities are missed by the average guy on the street. Our investors tend to be a bit more clued up and comfortable with the asset class,” he said.
The industrial units, which range in size from 150 to 1000 square metres (there are also 23 strata titled storage warehouse units) are expected to generate rents of between $200 and $230 per square metre.
Mr Thomas said there was very little vacant industrial space within 30 kilometres of the Sydney CBD, a trend that was occurring in all major urban areas around the world.
“A lot of former industrial areas like Roseberry, Alexandria and Mascot have been rezoned for residential,” he said. “So I don’t think any of our investors will have trouble finding tenants.”
Mr Miles said financing was also not an issue for most borrowers.
“Banks will fight for this kind of business. Interest rates are very good, similar to what you get in residential. Some banks will lend up to 100 per cent,” said Mr Miles, a director at Loan Centric.
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