All eyes on Perth residential market but another property type is gaining traction
For real estate investors tempted by the strong gains Perth has made over the past year, another property type might be worthy of consideration.
Perth’s red hot residential property market has pulled in the investors and headlines but another real estate asset class is also generating capital growth as well as rental yields that exceed the housing sector.
As with Perth’s diverse real estate market, the industrial, office and retail markets in Perth are each performing differently.
These are preliminary figures and are likely to increase as more sales settle. It is also a broad overview of the Perth commercial market.
Industrial property
The industrial market is currently the standout performer in the commercial market. Broadly speaking, there is demand for larger industrial lots but a shortage of developed land. As a result, prices have been rising and this is expected to continue.
Over the past few years, the number of sales has been higher then pre-Covid levels and prices have now exceeded the figures seen before the economic downturn.
There were 1,005 industrial sales recorded so far in the year to May 2024. This is 13.4 per cent lower than in the 12 months to May 2023.
The annual median sale price per square metre (sqm) at the end of May was $2,353, which is 13.3 higher than the year before.
Across Perth, 8.7 per cent of industrial sales were priced between $100,000 - $250,000, 25.0 per cent between $250,000 - $500,000, 19.8 per cent between $500,000 - $750,000, 10.6 per cent between $750,000 - $1 million, 30.4 per cent between $1 million - $5 million and 5.5 per cent over $5 million.
Perth’s South East sub-region had the most sales, with 258. The Inner sub-region had the highest annual median sale price per sqm at $2,968.
Office property
The office market has been softer than the industrial market. While the number of sales is higher than before the pandemic, prices are lower, However, they have been rising slowly.
Office vacancy rates have been fairly stable. According to the Property Council, the Perth CBD has defied the national trend by recording the only decrease in the office vacancy rate among all capital cities. It fell from 15.9 per cent in July 2023 to 14.9 per cent in January 2024, which was the lowest vacancy rate since 2015.
At the time of writing, there were 344 office sales in the 12 months to May 2024. This is 1.2 per cent higher than the year before.
The annual median sale price per sqm was $4,239 at the end of May, which is just 0.8 per cent higher than May 2023.
Across Perth, 21 per cent of office sales were priced between $100,000 - $250,000, 34.6 per cent were between $250,000 - $500,000, 21.6 per cent were between $500,000 - $750,000, 8.3 per cent between $750,000 - $1 million, 13.6 per cent between $1 million - $5 million, and 0.9 per cent over $5 million.
The Inner sub-region had the most sales at 145 sales. The North West sub-region had the highest annual median sale price per sqm at $4,652.
Retail property
The retail market has shown more price and sales volatility than the industrial and office markets.
The retail market is more greatly affected by consumer sentiment than the industrial or office markets. When house prices are rising, people feel wealthier and are more likely to shop. When interest rates rise, discretionary spending declines and it becomes harder for retailers.
Although property prices are rising, mortgage holders and buyers are feeling the pinch of 13 interest rate rises that have seen mortgage repayments increase by about 50 per cent, as well as the overall rise in the cost of living.
There were 139 retail sales in the 12 months to May 2024. This is 6.1 lower than in the previous year.
The annual median sale price per sqm at the end of May was $4,059, which is 11.1 per cent lower than 12 months prior.
Across Perth, 8.1 per cent of retail sales were priced between $100,000 - $250,000, 31.6 per cent between $250,000 - $500,000, 23.5 per cent between $500,000 - $750,000, 5.9 per cent between $750,000 - $1 million, 27.2 per cent were between $1 million - $5 million, and 3.7 per cent over $5 million.
Perth’s South West sub-region had the most sales, with 34. The Inner sub-region had the highest annual median sale price per sqm at $7,333.
Higher yields, higher risk
When it comes to property investment there is a lot of focus on residential property but the commercial market also offers excellent opportunities for investors with some unique features that aren’t available for residential investing.
For example, the yields are generally higher, commercial leases are longer than residential leases, and the tenant pays a lot of the costs, or outgoings, such as fitting out the premises, council and water rates, strata fees and insurance.
But with higher yields comes higher risk.
You are at greater financial risk due to longer periods of vacancy in the commercial market compared to the residential market. If a commercial tenant leaves, you could find your property is vacant for months, or even years.
Like residential investing, it is important to get a good tenant. A good tenant lowers your risk and also makes it easier to sell your property. Interestingly it can be harder to sell the property if a commercial lease is coming to an end. Banks and valuers tend to see this as lowering the property’s value, which may make it more difficult for a potential buyer to get finance.
Be aware that commercial investing generally requires a greater financial input from the buyer. Typically, banks prefer a 20 per cent deposit for residential investors. In the commercial market the deposit requirement can be 30 – 40 per cent.
If you’re currently investing in commercial property, or considering it, it is worth speaking to a local REIWA commercial agent to get an on-the-ground update on the conditions for your investment.
