Commercial Property Gains Investors Amid Rate Cuts

Investors are shifting their focus from cash to commercial property as interest rates begin to fall. This is largely due to lower returns on term deposits combined with renewed demand across office, retail and industrial property sectors. With further rate cuts from the central bank expected soon, many are aiming to take advantage of rising yields, although risks such as high vacancy rates and tighter financing conditions remain.

Commercial property has long lagged behind residential markets. The gap widened after the pandemic, with lower office occupancy levels putting pressure on valuations. However, recent economic signals and policy changes are beginning to shift that trend. The Reserve Bank is widely expected to reduce interest rates again, prompting more investors to explore income-generating options like commercial property.

Among asset types, industrial real estate has led the recent recovery. After a period of weakness caused by rising rates, it began to rebound in early 2024. Retail spaces are also benefitting from limited supply and future mixed-use development potential. Office buildings, while still facing challenges, appear to have stabilised. Improving buyer sentiment and price levels suggest market conditions may have reached a turning point.

Current gross yields are attracting attention. Returns for retail sit around 6.5%, followed by office at 5.5% and industrial at just under 5%. These returns stand well above the average term deposit, which is drifting toward 3%. This difference is drawing in investors interested in stable income as well as those seeking long-term capital growth.

Industry professionals say central business districts in Sydney and Melbourne remain key targets due to limited land availability and strong potential for vertical development. Entry into the market is still possible for under $500,000 in some areas, although premium locations demand significantly higher prices. Some investors are also using self-managed super funds to buy commercial properties, which they then lease back to their own businesses. This approach combines capital growth potential with practical utility.

Commercial property investment does differ from buying residential real estate. GST may apply in some cases, lending is typically more restricted and vacancies can take longer to fill. Despite this, experienced and strategic investors appear to be welcoming a new phase of growth as market conditions continue to become more favourable.

Source: The Australian, Real Commercial, Savills