Investing in the regions – Why commercial property should be part of your portfolio
The flow on effects of COVID-19 are vast and varied, with plenty of changes seen in the real estate industry since 2019. With many Australians’ realising their dream of a regional move – thanks to more flexible working arrangements and a refreshed perspective – residential sales in the regions are booming. The Australian Bureau of Statistics revealed that 2020 saw the largest net inflow on record from capital cities to regions. As a result, demand for services in the regions are experiencing phenomenal growth, making investment in commercial property in the regions a sound portfolio addition.
The changing shape of commercial property
Bricks and mortar retail spaces and city offices have felt the effects of a COVID driven digital shift. COVID has turbocharged the growth of online retail, with NAB merchant data showing a 62.6% increase in online retail in the 12 months to July 2020. This is driving a greater demand in warehouse space and 3PL (third party logistics) facilities. Alongside the boom in e-commerce, COVID has led to consumers rediscovering local stores and shopping precincts and establishing stronger connections within their communities. This trend of ‘localism’ has been driven by restrictions on travel, and a desire to support local businesses through difficult times. With more employers offering flexible working arrangements, many CBD office spaces are forever changed. It’s predicted that an average of 50% of the workforce could be working from home at least two days a week in the post-COVID world. As with the accelerated shift to online retail, COVID has accelerated the move to digital, flexible workplaces.
Continued regional growth is on the horizon
With many local governments committing significant investment into the regions, population growth is set to continue. For example, regional Victoria is benefiting from The Big Housing Build project – where $1.25 billion has been committed to providing affordable housing to meet demand in regional Victoria. Similarly, South Australia has in place the Regional Growth Fund – a commitment of $160 million over 10 years to support regional South Australia. With each state and territory pouring significant investment into regional housing and infrastructure, for sustainability, local businesses must follow.
The benefits of investing in commercial property in the regions
While population growth is a key driver for demand in commercial property, there are several other factors that make investing in commercial property an attractive portfolio addition:
- Greater return on investment – commercial property currently offers the highest cash flow in Australian real estate and typically provides strong returns through capital gains and income. Tom Harrop from First National Real Estate Tweed Sutherland (Bendigo, Vic) says “Despite the difficulties of COVID, we’ve had a better performance over the past 18 months than in the preceding 10 years. The prices our vendors have been achieving have been staggering. Cap rates have been around 6-6.5%, but two of the most recent in the Bendigo CBD have achieved a touch over 5%.”
- Longer leases – commercial leases typically span anywhere from 3-15 years versus residential leases which can be as little as 6 months. Commercial leases provide you with security and an investment that you can sit back, and watch pay itself off.
- Ability to add value –regional commercial properties typically have more space available for growth than properties in built-up metro areas. This provides investors with the opportunity to further develop the property and increase rental income. This can include things like subdividing a large block, renovating, renegotiating a lease, or even changing the land use (to residential for example).
- Less land tax and levies – with values of commercial property in the regions more affordable, investors benefit from lower land tax. Government levies such as parking space and new build levies that can apply in central business districts are also avoided.
What to look for in a commercial investment in the regions?
As with any investment, investing in regional property requires careful research and analysis. Here’s what to look out for:
- Population growth – focus your eye on areas with a rapidly rising population and an investment in infrastructure to match.
- Economic diversity – while a regional hub might be booming as a result of a new industry, diversity is key. It’s risky to invest in a town that relies purely on a small number of industries for employment.
- A strong local economy – check how the median household income of the area is tracking, if it’s growing faster than inflation, it shows affluence and spending potential which is critical for local businesses to succeed.
- Large developments in the pipeline – a significant business or service establishing in a regional area will drive employment opportunities and can lead to population growth.