SMSFs fill commercial asset gap left by foreign buyers
The gap left by foreign buyers in the mid-tier commercial property markets is being quickly filled by local investors, particularly cashed-up self-managed superannuation funds (SMSFs), commercial selling agents say.
Mum-and-dad buyers often flock to auction houses looking for higher returns in service stations, childcare centres or retail shops and up until the past year or so this group also included foreign buyers, particularly Chinese buyers.
The capital transfer clampdown in China over a year ago led to a dwindling number of Chinese investors in the market but new capital is being stumped up by SMSFs, Raine & Horne says.
Big commercial auction house Burgess Rawson says SMSF buyers now make up 60 per cent of its commercial asset customers, compared with 32 per cent three years ago.
“A volatile sharemarket and low returns on cash is seeing SMSFs turn to commercial real estate in droves,” Raine & Horne executive chairman Angus Raine said.
“This is further supported by the escalation in SMSF numbers, with an average of 34,000 new SMSFs being established each year.
“Commercial property is increasingly recognised as a highly desirable asset delivering strong capital growth, healthy yields, long-term leases and low maintenance costs, all of which is extremely appealing to SMSF trustees.”
Raine & Horne gathered the information through surveying its 35 offices nationally. It said there was an overwhelming response that foreign investor activity has dropped off, and SMSFs are dipping their toes back in the pool of assets, encouraged by less competition from foreign buyers.
Burgess Rawson also said three to four years ago, many buyers were acquiring commercial assets in family trusts, in syndicates, companies or in their own names but have now switched to using their own SMSFs to buy properties, particularly since SMSFs were permitted to borrow to buy. The number of offshore buyers for Burgess has not grown since 2015.
The low interest rate environment as well as favourable SMSF buying structure – borrowing is permitted – is a strong factor driving many SMSFs to buy and small and medium enterprises to own their own commercial premises.
But, coupled with a tight supply of stock, particularly with many commercial areas being converted into housing, the consequence is compressed yields, which in the long term could put pressure on rents to tenants.
“Continued record low interest rates are making it more cost effective for many small-to-medium-sized enterprises [SMEs] to own rather than lease their premises,” Mr Raine said.
“The commercial asset is often held within the proprietor’s SMSF providing a win-win for all parties – security of tenure for the business, and a strong level of control over super fund returns.”
Burgess Rawson has seen yields fall as low as under 4 per cent for childcare centres, properties with surplus land and development upside and fast food-anchored retail properties in popular and metropolitan areas. In quieter times, these assets would usually deliver much higher yields of up to 9 per cent.
SMSFs and mum-and-dad investors continue to chase these assets despite falling yields because they deliver strong capital growth, long-term leases and low maintenance costs, Mr Raine said.
