Falling house prices and increased regulation are driving mum and dad investors out of residential property and into higher-yielding commercial assets like fast food outlets, petrol stations and childcare centres which come with long leases to major brands and sit on prime land banks.

A series of commercial property portfolio auctions in Sydney, Melbourne and Brisbane last week, where 29 out of 30 properties offered were sold, generating $85 million in total sales, highlighted this phenomenon, according to Ingrid Filmer, CEO of real estate firm Burgess Rawson, which hosted the auctions.

Ms Filmer told The Australian Financial Review that a “mass exodus of landlords from residential property” into commercial property had powered the 98 per cent clearance rate.

“I was in the room when contracts were being signed and many of those people were first-time investors in commercial property,” Ms Filmer told The Australian Financial Review.

This anecdotal evidence is borne out in research done by research house PropTrak.

It shows that investors’ share of total housing purchases has fallen from about 15 per cent in late 2018 and early 2019 to just 5 per cent at the end of 2022.

At the same investors now account for more than a quarter of all home divestments compared with just 15 per cent four years ago.

This gap – between investors selling out and those buying – widened noticeably in the final quarter of 2022, as interest rates moved to their highest level in a decade.

Ms Filmer said the sweet spot for first-time commercial investors was assets priced below $3.5 million.

Many of the buyers, Ms Filmer said, were paying with cash, and therefore not impacted by rising interest rates.

“These are mum and dad investors who were previously negatively geared in residential property. They can put the same money into something like a Subway restaurant and get a higher return and not have to worry about anything.”

Not only do they get the benefit of long “set and forget” leases, but their tenants are major brands like McDonald’s, Hungry Jack’s, 7-Eleven and United, who are unlikely to ever default on their rent payments. In addition, sites are usually in prime locations, that are likely to appreciate over time.

“These are great tenants you know and can trust, and they have already done all the hard work to find great sites,” Ms Filmer said.

She added that the increase in average yields from 4.88 per cent in December to 5.41 per cent last week (based on Burgess Rawson portfolio auction results) was also encouraging other cash buyers back into the market on the perception that there is “value for them”.

However, whilst yields have increased, analysis of Burgess Rawson portfolio auctions going back a year, shows the average yield has bounced around between about 4.75 per cent and 5.5 per cent, whilst the Reserve Bank has increased the cash rate by 325 basis points over that time.

This suggests that small retail assets like fast food outlets and petrol stations are holding their value better than other property types, such as regional shopping centres and office buildings.

“Yields have pushed out but nowhere like the rate rises that have occurred,” Ms Filmer said.

“We estimate movement of between 25 and 100 basis points across the various categories. Childcare has increased about 20 basis points, fuel about 45 basis points, but fast food has not moved at all,” she said.

This was evident in the sale of a McDonald’s restaurant in Broken Hill in outback NSW, which sold prior to auction for $5.75 million on a tight 3.9 per cent yield.

In another example, a Guzman y Gomez outlet in Brisbane, offered with a lease in place till 2031, sold for $4.2 million on a 4.6 per cent yield.

A notable sale at the Melbourne auction was the Rockwall Bar & Grill at tourism hotspot Salamanca Place in Hobart. It sold soon after being passed in at auction for $5.95 million on a yield of 4.3 per cent to an investor who is based overseas but has other interests in Tasmania.

Selling agents George Burbury and Scott Newton from Knight Frank said another Tasmanian investor had also shown interest in the property, while two more parties submitted bids in the room.

“From a price per square metre perspective, this sale represents one of the highest land rates we have seen on the Salamanca strip,” Mr Newton said.

Extracted in full from: Mum and dad investors quit housing for fast food and petrol stations (commercialrealestate.com.au)

SHARE THIS ARTICLE: