Wealth Creation: Commercial property better than the banks

Commercial property investors can earn rental yields as high as 11%, about double the yields from bank deposit products, if they are willing to bear the risk, according to research by Colliers International.

Primary yields in the bulky goods store sector range from 8.5% to 9.5%, and yields can be as high as 11% in secondary markets like the Gold Coast.

But Colliers head of national research Nerida Conisbee warns that this market is currently oversupplied due to a lot of development in the mid-2000s.

There are 112 bulky good centres in Australia covering more than 2 million square metres of retail space with an average size of 18,000 square metres, according to Colliers

In 2011 an additional 318,000 square metres of bulky good space was added to the market.

According to realcommercial.com.au, there are close to 100 bulky good stores up for sale on the Gold Coast, with 335 stores available for lease

Conisbee says the Gold Coast is seen as an even risker bulky goods investment because there are fewer tenants than other markets and higher vacancy rates.

“A longer-term hold might be OK,” she says.

Investors looking for less risky investments with strong yield potential should consider the neighbourhood regional shopping centre market, Conisbee says.

Prime yields in sub-regional and neighbourhood shopping centres start from around 7% and rise up to as 10% in the secondary market.

Conisbee suggest investors consider regional shopping centres under $5 million as well as suburban strata offices.

Those investors with shallower pockets might consider investing in a listed or unlisted retail trust to gain exposure to the sector.

Conisbee says smaller industrial assets are also doing particurlarly well in Melbourne and Brisbane, where there is an undersupply, with yields ranging from 7.75% to 8.5%

There are, she says, opportunities in strip retailing, but she says investors should tread carefully because of huge variation in quality and returns.

She says the most sought-after assets are Sydney and Melbourne offices and regional shopping centres – out of reach of smaller investors, though exposure is possible through buying shares in REITs and investing in unlisted trusts.

However, yields are lowest in these “sharpest investment categories” because of the strongest investor demand.

“This is because foreign investors are really looking and competing for these assets,” she says.

Other prime assets being sought by foreign investors and superfunds are Perth and Brisbane CBD offices.

The average yield in Sydney and Melbourne CBD offices ranges from 6.5% to 7%; from 7% to 7.75% in Brisbane and between 7.5% and 8% in Perth.

Outside of the sought-after CBD markets, prime yields range from 7.5% to 8.5% in CBD fringe locations like North Sydney, rising up to more than 10% in secondary locations in places like Chatswood and St Leonards.

Adelaide prime CBD fringe yields range from 6.5% to 7.25%, according to Colliers.

This article first appeared on Property Observer.