Ray White Portfolio Magazine - October 2022

Ray White Commercial has continued its upwards trajectory as we round out the third quarter of 2022. Overall, Ray White Commercial’s sales value is up 6.52 per cent on last year, and up a whopping 112.4 per cent on 2020. With live listings down 13.68 per cent, savvy property owners are taking advantage of lower stock levels and increased values.

Here at Ray White we pride ourselves on being an auction powerhouse, believing that this transparent method of sale provides the best results for our clients. This quarter, Ray White Commercial auctions have achieved results 24.3 per cent higher than the highest offer prior, proving that by creating competition we can achieve the best results. Ray White Commercial’s scheduled auctions are up 33.5 per cent compared to 2021, as our agents and clients continue to realise the strength of this method.

Last month we launched the Between the Lines live webinars, hosted by our head of research Vanessa Rader. During the webinars, Vanessa and a panel of experts discuss topical subjects and provide valuable

insight into the commercial market. Hundreds of people tuned in to the first two webinars, and we look forward to hosting our third Between the Lines live on October 25. If you would like to register for these marketleading webinars, please touch base with your local Ray White Commercial agent.

We’ve continued to face new challenges and changes to the market as we embark on our journey in the postcovid world, but there are still many positive signs for the commercial property sector. Our team of talented agents, property managers, and admin staff continue to work hard for our clients, making sure we achieve the best results possible. I look forward to what’s in store for the final quarter of 2022.

ANDREW FREEMAN HEAD OF AGENCY OPERATIONS

VANESSA RADER

STUDENT ACCOMMODATION IN A POST-PANDEMIC ENVIRONMENT

OVER THE LAST 15 YEARS, THE STUDENT ACCOMMODATION MARKET HAS GROWN IN SOPHISTICATION. MOVING AWAY FROM PURELY ON-CAMPUS FACILITIES TO STAND ALONE, PURPOSE BUILT ACCOMMODATION OPTIONS WITH QUALITY MANAGEMENT. LESSONS LEARNED OFFSHORE SAW MANY PLAYERS ENTER THE AUSTRALIAN MARKET CAPITALISING ON THE GROWING INTERNATIONAL STUDENT NUMBERS WHICH COME TO AUSTRALIA TO TAKE ADVANTAGE OF THE QUALITY EDUCATION AVAILABLE.

As a result, we saw the emergence of student accommodation as a commercial investment asset with a range of buyers looking to take advantage of high occupancy and stable returns which the asset class had to offer. We saw a range of ownership structures of these assets with some assets owner operated, others sold to local and offshore investors with onsite managers in place while others have been sold down to individual strata owners with a manager appointed.

The pandemic period has been a trying time for this asset class given the remarkable declines in international student numbers

coming to Australia. Despite this, it did not deter the landmark $2.1 billion sale of the Urbanest portfolio settling in 2020 amidst the COVID-19 pandemic locking down our borders. Investment in these 14 assets across the country came from experienced offshore operator Scape in JV with AXA and Alliance after purchasing the Atira portfolio in 2019 making Scape the largest owner of student accommodation facilities in Australia. Continuing their push and commitment to the asset class, Scape has purchased UTS assets this year while GIC made partial investments in a range of assets highlighting the international commitment to the student accommodation sector.

Student accommodation assets have shown a wide range in investment yields over the last ten years, often showing a significant spread to traditional commercial investments average yields prior to the pandemic ranged in anywhere between 6 per cent and 8.5 per cent. Given the reduction in interest rates we saw yield sharply reduce over the last couple of years with ranges reducing closer to 5 per cent to 6 per cent however as interest rates rise and international student arrivals slow to recover, the future for student accommodation is uncertain.

Latest results from the Department of Education highlights that international student arrivals are more than 60 per cent below pre COVID-19 levels for some cities. The attraction from overseas students has somewhat diminished, especially from markets such as China where there has been an 84 per cent decrease in student arrivals. India is now the major contributor to international student numbers in Australia, representing 16.52 per cent of all arrivals which are down 61.62 per cent compared to June 2019 results. The ability to learn remotely has seen been a major obstacle in attracting students as well as political pressures resulting in a significant decline in international demand which makes up the bulk of tenants in student accommodation assets. This is supported by the strong number of students who hold visas who are currently not in Australia, currently there are 19 per cent of visa holders who are not

currently in the country, again China the major contributor of this with 37 per cent of visa recipients back home, followed by Columbia at 27 per cent.

However, considering the low vacancy environment in the broader residential market and the strong upticks in rents particularly in major cities, we are likely to see more domestic students gravitate towards these specialised accommodation options with their inclusive structures which often include outgoings such as internet and electricity. Looking ahead, until there is greater recovery in the international student market, occupancy levels may be under pressure together with rising interest rates resulting in yields moving back towards pre COVID-19 levels. This is expected to further hinder the completion of close to 5,000 new student accommodation units in the development pipeline across the country.

WHAT ARE THE BIGGEST ADVANTAGES OF AUCTION COMPARED TO OTHER METHODS OF SALE?

Providing the Agent has done the work the Auction method provides all stakeholders with a time, place and transparent platform to compete for the asset. Once the Auctioneer calls for an opening bid buyers have a very clear vision of what is required to buy a property. No negotiations, conditions or unknowns. A potential buyer will know that being the last group to raise their hand, paddle or flyer will buy them a property or at least, give them a 1-1 chance to finalise a contract. No other method gives a potential buyer such clarity. This results in giving buyers confidence to go to their top end and under a competitive environment this works out well for vendors.

RYAN TRICKEY - RAY WHITE COMMERCIAL GLEN WAVERLEY

We continually find that the transparency of the auction process gives confidence to buyers and sellers alike. Combined with the emotion of bidding on the day, along with seeing other bids in real time, we have been able to continue to realise the true value of retail assets at auction in spite of the continued economic turbulence through 2022.

MICHAEL FELTOE - RAY WHITE COMMERCIAL QUEENSLAND

One of the biggest advantages of auctions is the buyer is looking at the property. It’s not about the price. It’s about the location, layout, zoning if it works for them. Then, during the auction process, they’re perfect for creating competition for the owner to ensure that they are getting the premium price in the current market conditions.

LISA DUNNE - RAY WHITE COMMERCIAL INDUSTRIAL M1 NORTH

When assessing auction when compared to other methods of sale, given that the asset is straightforward, auctions will always generate competition when there are a number of buyers looking at the same opportunity. It is also an open and transparent platform that allows buyers to compete in a public forum. In a strong market, it consolidates the competition, in a market where the economy is shifting such as today, it provides the buyers with confidence in the market. Auctions also sets a timeframe that allows purchasers to work towards, putting a line in the sands for buyers to perform without dragging out the process leading to a more timely result for the Vendors which is almost always beneficial.

VICTOR SHEU - RAY WHITE COMMERCIAL WESTERN SYDNEY

TRAUMATIC ACCIDENT LEADS COMMERCIAL AGENT TO NEW PASSION

Ray White Commercial TradeCoast agent Jay Jones never expected to get into real estate or golf but, after a horrific accident caused him to lose his left arm, Jay was taken on a journey which led him to two new passions.

In 2015, while working in the coal mining industry as a fourth year apprentice heavy diesel mechanic, Jay was working with a more experienced tradesman to replace the tyres on the site’s new dump trucks when a fault in the last rim caused the tyre to explode.

“My colleague was killed instantly and I was thrown approximately 10 metres across the workshop floor and had catastrophic injuries to my left arm,” Jay said.

“The air pressure had also blown the majority of my clothes off along with my protective eye wear and hard hat which was later found approximately 75m away.

“It was a method of therapy and gave me something else to focus on.”

The following years were big ones for Jay as he joined Queensland’s amputee golf community, and played his first game in 2016, as well as joining the Ray White Commercial TradeCoast team in 2017.

“I had never really expected to get into golf or real estate, they just happened due to a moment in time, there were no real plans in place,” he said.

“It’s an exciting time for golfers with disabilities as some of the larger professional tours have opened up to the inclusivity of golf and offer smaller fields of disabled golfers the opportunity to play alongside the pros in the events.”

Jay held the world number one spot in the amputee golf competition for the 18+ handicap division in 2019, and has since moved into the 0-18 handicap division.

Prior to some health issues earlier this year, he was in the top 100 golfers with disabilities worldwide.

“My main goal in golf is to qualify for the Australian All Abilities which is played alongside the Australian Open. A top 50 position in the world rankings will give me a great shot at this,” he said.

He said the accident and his experiences since had given him an appreciation for the smaller things in life.

“There is nothing like a near death experience to help bring clarity and perspective to your life,” Jay said.

“I have tried to make the most of each experience and opened myself up to trying things that I would have never given a second thought prior to the accident.

“I am currently in the process of building a new business that focuses on building a better mindset around workplace safety and will involve visiting the mine sites across Australia and sharing my story with the workers.”

EXPERTS DISCUSS RESIDENTIAL DEVELOPMENT AND PROJECT SALES IN THE CURRENT CYCLE

Ray White Commercial’s Between the Lines live webinar attracted 300 listeners this month as experts discussed residential development and project sales in the current cycle

The session was hosted by Ray White head of research Vanessa Rader who was joined by managing partner of Ray White Projects Eddie Mansour and Partner | Residential Development of Ray White Valuations Peter Wiltshire who discussed what factors are currently at play impacting the residential market, the shift in which assets are in demand from buyers, and the changing attitudes towards financing from large developers down to first-time buyers.

“It’s a really interesting topic at the moment as we have a mismatch between the fundamentals at play - interest rates are up, supply is down, construction costs are up and there’s labour shortages, and residential vacancies are really low,” Ms Rader said.

“So it's a really good time to look at what’s happening in the market.”

Mr Wilshire said he was still seeing his more experienced clients purchasing sites and getting projects underway.

“There’s some short term pain with interest rates and construction costs but they can see in 18 months there’s going to be an undersupply,” he said.

“They know if they can get through the short term pain there’ll be huge demand there.”

Mr Mansour said while he was seeing the projects space gaining momentum, there was still some uncertainty around house and land as prices were perceived by buyers as having peaked.

“When construction prices started increasing it really started throwing a lot of developers’ feasibility into question and whether the project could pull through, but I think we’re past that period now,” he said.

“It seems that construction costs have plateaued and developers are starting to get reenergized and are commencing projects again.

“With house and land we’ve seen a lot more people nervous - if they’re starting with a certain price it’s being blown out by the end of it.

“I’m seeing a return to one contract with the land and house being built together. It’s giving buyers confidence there’s a set price.”

Ms Rader said the apartment market had seen a consolidation in prices but a decline in turnover, and asked our experts what was happening in the off-the-plan market.

“A majority of the construction finance was coming from the banks but now it’s a lot of the non-banks doing finance these days,” Mr Wiltshire said.

“The banks have taken a step back which has given these nonbank lenders the chance to get a bigger market share.

“It costs a bit more in rates but you can get started a lot quicker, it’s easier to sell off-the-plan when you can see activity on site.”

Mr Mansour said the off-the-plan market was gaining momentum in Australia.

“We’re seeing a lot of parent assisted buyers and, looking at the market now, you need some kind of assistance,” he said.

“I don’t mind when we’ve got parents who come along because they ask questions, and it’s all about confidence when you’re buying off the plan.

“There’s some great questions being asked - who was the developer was the biggest question, but it’s now who is the builder.

“We want to give them that transparency they want when it comes to off-the-plan.

“Australia is still pretty new to off-the-plan when in some asian markets apartment living is the norm.”

Stay tuned for our next Between the Lines live webinar on October 25.

“IT SEEMS THAT CONSTRUCTION COSTS HAVE PLATEAUED AND DEVELOPERS ARE STARTING TO GET REENERGIZED AND ARE COMMENCING PROJECTS AGAIN.”

COLD STORAGE: HEATING UP OR COOLING OFF?

VANESSA RADER

Head of Research

THE COLD STORAGE ASSET CLASS HAS GONE THROUGH A FEW PERIODS OF CHANGE OVER THE LAST TEN YEARS. THE EVOLUTION OF THIS INDUSTRIAL ASSET CLASS HAS SEEN INVESTMENT DEMAND INCREASE MORE RECENTLY, NOTABLY FROM OFFSHORE AND INSTITUTIONAL GROUPS. POPULARITY IN THE ASSET WAS REIGNITED AGAIN DURING THE PANDEMIC PERIOD WITH EXPANDED USE INTO HEALTH SCIENCES, AS THE NEED TO MANUFACTURE, STORE AND TRANSPORT VARIOUS MEDICAL GRADE PRODUCTS GREW. THIS NARROW SUBSET OF AN ALREADY LUCRATIVE INDUSTRIAL ASSET SAW DEMAND TO PURCHASE INCREASE, RESULTING IN STRONG COMPRESSION OF YIELDS LAST YEAR, ALBEIT INTO 2022 THIS HAS MODERATED.

Growing in popularity as an asset class during the 2015-2018 period, this asset type, which was often termed as “food & beverage”, is a subsector to industrial also known as refrigerated warehousing. During this time, this sector evolved into a dynamic and less owner-occupied asset due to users demanding better innovations in technology and the changing requirements of the end consumer wanting reduced timeframes for the delivery of perishable food items. The peak in transactions was witnessed in 2014/2015 where over $450 million changed hands driven by portfolio transitions across the country, notably the eastern seaboard.

Post this period we did see tempered investment activity; however, since 2019, transactions once again grew fuelled by quality stock being completed, together with the increasing retail demand for fresh food, as well as quickly changing health science needs. During the 2021 calendar year over $320 million has changed hands with yields ranging from as low as 4.3 per cent through to 5.5 per cent, with institutional demand instrumental in compressing these yields which were in the 6 per cent to 7.5 per cent range a few years prior. During 2022, however, transaction levels have decreased inline with the overall decline in commercial investment activity, due to rising interest rates and inflation which is expected to impact yield levels.

Refrigerated facilities that cater to food and beverage production, along with refrigerated warehouse and distribution facilities in Australia attracted several new players over the past five years, notably international companies with strong track records in their own respective countries. Since this time, we saw ongoing interest from these offshore buyers and domestic institutional investors fuelling competition for this bespoke asset type. Looking at sales over the past 18 months, the continued decline in owner-occupiers is clear, representing more seller activity while a combination of cross-border, institutional and REITs as net buyers seek to capitalise on high user demand, low vacancy and rising rental rates in the current high inflationary market.

Looking ahead, despite high occupancy and ongoing need for cold storage assets, broader market conditions will see some moderation to yields and slow down in investment activity; however, these specialised assets will be one to continue to watch in the short to medium term particularly due to their expanded need across both food and beverage, and health science industries.

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