Jacob Field Published by Jacob Field on 4 April 2022

What is the outlook for commercial warehouse yields?

Best areas to look at?

The outlook is interesting, yields will recover.

I think the short term we did see a lot of people piling into commercial properties in the second half of 2021.

The thinking was that they’ve made a lot of money in Sydney and Melbourne and potentially their principal place of residence, now let’s go and invest that into commercial properties.

There’s not many commercial acquisitions each year in Australia in the scheme of things.

It’s a small fraction compared to residential.

So when you have a groundswell of people and eyeballs coming into a commercial space, it does change the dynamic very quickly.

Commercial works in a little bit of a different way when you’ve got a lease on that property and I’m just gonna use funny numbers here.

But if you’ve got a lease on that property of $100,000, the banks would look at that lease and that’s how they primarily determine the value of that property.

So the $100,000 lease, depending on the type might equate too, you know, say, a $2 million dollar valuation on the property.

You’re not really going to change the dial too much on that valuation until you change the lease attached to it.

So when you buy that property

Eg You have $100,000 a year lease and it’s got five years left to run.

The whole idea here is that it’s worth $2 million.

So that’s what’s called yield compression.

The yield on the valuation is 5% right.

Net yield.

That’s great. But then people are coming in and they’re paying more than the valuation and they are compressing the yield that they find acceptable for themselves to purchase.

They might pay $2.5 million, they might pay $2.8 million.

Their expectations about what they are comfortable, what they’re targeting for yield is reduced.

The yields are compressed and that’s what we’ve seen.

That’s a phenomenon that we have seen.

The fundamental value of that property hasn’t necessarily changed.

Just because someone paid $2. 5 million right? In terms of a return on cash flow. So, will yields recover, it’s going to be a slow process for yields to recover because leases have to turn back over again. You might have seven years left to run on the five by five. Okay, leases have to recover and also the number of people buying in the market has to slow down.

All right. So that’s an environment where the outlook for your recovery in the commercial space. Would that happen anytime soon? No. Is commercial still a viable investment? Yes, I think we just transacted on a 7% net yield in the sunshine coast area for a client literally last week. Our offer was accepted last week.

It’s still in the final stage of the due diligence post offer acceptance. You know, a lot of best areas to look at. Well, the areas that we look at for residential, you know, if we’re buying in toowoomba for residential, we’ve just finished buying there now.

But if we’re buying in toowoomba for residential, okay. We don’t buy in the scarce suburbs that are already in field, we buy over in the hubs that have a lot of new home construction, there’s going to be increasing population in that corner of the area. Um so when you’re buying now, you’re going to have increased foot traffic, increased eyeballs, increased demand for the tenants businesses in that area.

You know, a painter who’s your tenant, he’s going to have more houses to build over the next few years. That’s how you need to look at it. Generally, you want the larger macro stuff happening in the same way that residential does happen. But then the sub urban positioning mix does change.

We actually seek out supply and not avoid it. Hope that answers your question there jim.