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August 10, 2022 by ash

Mum and dad investors not deterred by interest rates

Average yields on smaller retail and commercial properties contracted by a “surprise” 36 basis points at a portfolio auction last week in Melbourne that generated more than $50 million in sales, despite the Reserve Bank lifting the cash rate by 100 basis points over the prior month.

Last Wednesday’s auction, hosted by agents Burgess Rawson, generated a 91 per cent clearance rate as 20 out of 22 properties sold under the hammer at an average yield of 5.12 per cent.

This was despite the RBA lifting the official borrowing rate by 50 basis points the day before the auction and by another 50 basis points on July 6.

At the previous Melbourne portfolio auction held on June 22, average yields increased 50 basis points to 5.5 per cent.

Yields – or capitalisation rates as they are also known – typically increase on commercial property investments as the cost of debt rises, whilst values tend to decline.

The Kofi Beans Cafe in Croydon attracted 40 bids and sold for $1.77 million on a 4.4 per cent yield.

Burgess Rawson managing director Ingrid Filmer attributed the “really interesting” result in Melbourne to the stronger WALE, or weighted average lease expiry, of 7.3 years on offer, which meant investors had the surety of income locked in over that period.

“We found that when the WALE went up, the yields went down,” Ms Filmer told The Australian Financial Review.

The trend is the exact opposite to what is happening at the bigger end of town, where institutional investors, especially in the industrial sector, are seeking to buy properties with short WALEs so that they can capture the surge in rents that is occurring when negotiating new leases.

Ms Filmer said properties with rental increases indexed to inflation were the most sought after, as were net leases, meaning the tenant is responsible for outgoings such as land tax (in some instances), council rates and other building costs.

“These results show private investors are undeterred by rate increases, but also that they don’t expect borrowing rates to get to 6 per cent,” Ms Filmer said.

Highlighting the point about the attraction of long leases, the premises of Pakenham Fruit &Vege, 53 kilometres south-east of Melbourne, were offered with a lease running until 2032. The large-format property retail attracted 48 bids and sold for $1.7 million on a yield of 4.6 per cent.

In another example in Croydon in Melbourne’s outer eastern suburbs, the Kofi Beans Cafe offered with a new 12-year lease attracted 40 bids before selling for $1.77 million on a 4.4 per cent yield.

Both properties were offered with 4 per cent fixed annual rent increases.

Burgess Rawson partner Shaun Venables said investors were generally only borrowing 50-60 per cent of the purchase price “so the impact of rising interest rates is felt less keenly”.

“It’s a flight to quality and investors are placing a high value on long-term lease profiles,” Mr Venables said.

Adding further weight to the argument that income-producing bricks and mortar assets remain highly regarded by private investors was the overall sales success achieved across three days of commercial property auctions hosted by Burgess Rawson.

The Melbourne auction was the second of three auctions held consecutively, starting with one in Sydney on Tuesday and finishing in Brisbane on Thursday.

Across the three days, $103 million of assets changed hands at an average yield of 5.5 per cent. The combined clearance rate was 82 per cent.

Whilst the average yield was higher in Sydney (5.7 per cent) and Brisbane (6.1 per cent), a total of 11 properties sold on yields sharper than 5 per cent.

The sharpest of these was a drive-thru cafe at 240 Epping Road in Wollert in Melbourne’s outer northern suburbs, which sold for $1.155 million on a yield of 4.13 per cent. It sold with a five-year lease and fixed annual increases of 3 per cent.