Getting the best performance from property investment

While there are pockets of value across all sectors, getting the best performance depends on choosing the right assets with good locations and occupancy.

Related: Direct or listed property? Investors weigh up their options

Office 

There have been many transactions of prime office real estate over the past 18 months, according to Australian Unity's Mark Pratt, which is perhaps a little incongruent with the fundamentals of the market. 

“We have seen commercial tenant occupancy levels fall off in most major cities with the exception of Perth, but we are still seeing really strong activity in office property,” Pratt says.  

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“The leasing conditions remain challenging, but people are happy and accepting of slightly tough cap rates because they fundamentally see there’s a good buying opportunity at current prices, with a view that the market will slightly recover over the next five to 10 years,” says Property Investment Research's Dinesh Pillutla.

Retail 

Despite the doom and gloom about the retail sector, the performance of retail property has been surprisingly good.  

“From a valuation perspective, people are happy to enter the market at fairly high cap rates,” says Pillutla.  

Pratt expects to see capital moving into assets such as shopping centres anchored by nondiscretionary grocery tenants like Coles and Woolworths.  

“It might not give you large amounts of capital growth over the short to medium term, but what it does do is certainly underpin capital values at the moment,” he says.  

AMP Capital's Damien Fitzpatrick says the super-regional shopping centres are the place to be.  

“Even though sentiment has been relatively negative over the last couple of years, those big regions are supported by the strongest population growth we have had for 40 years. 

“So if you can get a position in the very high quality regional shopping centres, they are always in demand,” he says.  

Industrial 

Industrial is hot at the moment, with plenty of money chasing good quality assets.  

“What we are seeing is that the leasing fundamentals in demand from occupancy is relatively flat, but the investment demand to buy them is extremely strong, and that’s from sovereign wealth funds from overseas,” Fitzpatrick says. 

“We act for a number of private clients, and because of the high yield in Australia and the relatively stable returns compared to the rest of the world, they are prepared to take the currency risk and come here, but what that is doing is driving prices and yields down.” 

Stacker agrees that sentiment is strong around industrial property. 

“We are seeing a lot of demand from mum and dad investors, but also big hedge funds are now focusing on this sector as an opportunity, so I think it will outperform over the next couple of years compared to office and retail.” 

Alternative sectors 

Investors can also look at alternative types of property, such as healthcare – the performance of which is driven by some different demographic factors to other types of commercial property.  

“Clearly there will continue to be a growing need for properties that provide healthcare for ageing Australians, and that demographic driver [stimulates] demand for these types of assets,” Pratt says.  

He adds healthcare property also typically has quality tenants on long-term leases, well-situated assets, and provides a higher income base as a proportion of its total return.  

“The dynamics of the healthcare industry really come together to provide a healthy income yield, and historically demonstrated a lower level of capital volatility than other areas of commercial real estate,” Pratt says. 

However Fitzpatrick warns that this type of commercial property can be directly correlated to the residential market, as investors sell out of their home to buy into a retirement village or aged care facility.  

“Where they gain an advantage is in the listed market, as you can get a wide diversification of properties just through buying a unit,” he says.