Have you been considering when is the best time to sell your commercial property? There are many factors that affect this timing and we will cover some of the key ones in this blog.
We also understand, however, that everyone’s circumstances are different, so this advice should be considered general in nature. If you are considering selling and would like to know if now is the ideal timing for you, considering your circumstances, your objectives and the details of the property, get in touch with one of our specialist commercial agents for a chat.
Strong Demand
Below, we will focus on the current market conditions and why it may be a great time to consider selling your property now.
Right now, we are seeing a continuing trend of strong demand from buyers across most market segments. The industrial market continues to remain the most popular segment of the broader commercial market, with high levels of demand from owner-occupiers and also investors, making for fantastic conditions for any vendor who is considering selling.
Investment properties continue to remain in high demand with buyers keen to secure quality commercial assets. We are seeing strong interest from buyers on all investment opportunities we market for sale, noting there have been, and continue to be, a short supply of good investment opportunities in the Central Coast commercial marketplace. The quality of the results being achieved from these investment sales has simply depended on the quality of the lease profile, the price-point, and the property itself. With such strong demand, this remains a great “sellers’ market”.
The commercial (office) market is still performing reasonably well, though it is the most balanced segment of the broader commercial market, being neither a “buyers’ market” nor a “sellers’ market”. While the covid-19 pandemic was thought to have badly impacted this market segment, locally we have seen a steady market through 2020 and 2021 and through 2022 we have actually experienced an uptick in positivity from buyers and, therefore, overall activity.
Circling back to the industrial market segment, as we continue to see very strong demand from industrial buyers, and supply not keeping up with demand, the situation is compounded by Central Coast Council’s inability to process Development Applications quickly. The Council has lost a lot of their human resources, setting back the pace at which they would normally approve DA’s. This means longer lead times for developments to come out of the ground, helping to satisfy the demand from buyers. As a result, the properties that are available, whether old or new, small or large, are all garnering huge interest when placed on the market, and achieving fantastic results, as buyers are having to make quick decisions to avoid missing out. Truly, this is a “sellers’ market”.
Reducing Borrowing Capacity
Anyone who has their finger on the pulse, or who knows someone who has their finger on the pulse, knows that we’ve had a sequence of interest rate rises, as well as record high inflation. Both of these things directly impact a borrowing capacity (i.e. how much money a bank will lend a buyer).
As interest rates rise, mortgage payments increase. We know, we know, ground-breaking …thanks for the astounding insight, C&F! What follows from this is reduced serviceability. This is what the bank takes into consideration when they look at how much they will lend a buyer. Given most buyers’ income is unlikely to have increased at the same rate as the recent interest rate rises, it follows that they can now only afford to service a smaller mortgage.
As we’ve briefly noted, the other big factor impacting borrowing capacity is inflation. For anyone paying attention to the latest announcement from the RBA, the September 2022 Quarter saw Sydney hit a huge 6.99% increase, over the September 2021 Quarter. You can read more about how inflation relates to the property market in our past blog here. High inflation means that our everyday living costs are higher (another obvious statement, we’re aware), which again impacts what funds a buyer has available to service a mortgage, thereby impacting how much the bank will lend a buyer.
While this reducing borrowing capacity won’t have the same impact on ‘cash buyers’, the vast majority of buyers require some level of finance and, as such, there can be a flow on impact to property values, especially where the value of a property is linked to the rental income generated from that property (i.e. investment properties).
For this reason, we can see the tides are likely to shift. Well, they’re already shifting, it’s just that the property market hasn’t quite seen the impact yet. As the impacts wash through, it is likely we will see an impact on property values, at least in sectors where buyer demand is more balanced.
Pressure On Yields
As we just briefly touched on above, properties that have their values linked to their rental income are likely to be impacted by rising interest rates. As the cost of borrowing increases, buyers will not be able to continue purchasing investment properties at low returns, as they will not be able to service the associated loans. Banks will also not lend as much for the property with higher interest rates, due to their increased risk of whether the borrower can meet their repayments.
This inevitably results in a drop in demand for investment properties at lower yields. The interest from buyers will still be there, just at a different price point, as they will require a greater return. While we may see some outlier sales at lower yields still, in a changing market, the average yield will certainly move as it inevitably must to meet the market demand.
Right now, we are still seeing great results being achieved, especially for quality properties with a strong tenant and lease profile anchoring the property, achieving yields of between 5% and 6%. Only a few years ago (say 6 or 7 years), we were regularly seeing yields of 8% and 9%. As interest rates have remained at record lows for the past number of years, yields have compressed, which has seen values soar. As an example, if a property is returning $50,000 Per Annum Net + GST, the value would be around $1,000,000 if it sold at a 5% yield, compared with $625,000 if it sold at an 8% yield.
Now that we are in an environment of increasing interest rates, it stands to reason that the days of yields at 5% to 6% are numbered, and they will start to soften again. How far they soften will depend on a range of factors, including how quickly and how far interest rates continue to climb. While this is welcomed news for buyers, as it means acquisition costs will reduce, relative to the same level of rent being generated by the property, it is most definitely not positive news for would be sellers.
If you are considering selling, please contact us for a review of your property and where its value sits, based on its rental return, its quality, and the tenant and lease profile.
Better Value To Sell As Investment Or Vacant Possession?
This is a great question that we get asked a lot by our clients. Whenever we’re analysing the value of a property for a client, we’re always analysing from multiple perspectives to determine where the property’s highest and best value sits.
Right now, the question of ‘will I get better value if I sell my property vacant possession or with a tenant in place’ has different answers depending on the market segment in which it sits. There are other factors, such as whether the property is under-rented or rented at a market rate, but for the point we’re making here, we’ll just assume the theoretical property is rented at a market rate.
Due to the rates we’re seeing paid by buyers in the industrial market, it is more likely than not that an industrial property will hold a higher value if sold vacant possession than if sold with a tenant in place. That is not an iron clad guarantee, as each property can be different, but right now, it’s a pretty reliable rule of thumb, especially for smaller industrial properties.
The office market is currently far more nuanced than the industrial market when it comes to where the greater value sits. The biggest difference we’re seeing in this market is not so much a disparity in values, whether sold vacant possession or as an investment, but in the time on market to achieve a sale. As investment offerings are not abundant, all investment properties are receiving great interest and as a result tend to sell in a much shorter time frame than offices being sold with vacant possession, where we rely on demand from owner-occupiers, or speculative investors.
As you can see, there are numerous factors that impact how a commercial (or even residential) property market performs. We have only touched on a few of those reasons, and the things to consider when you are trying to determine whether the timing is right or not to sell your property.
We love to help people and we love to give advice to best suit our clients needs and objectives. If you’ve been considering selling and want to understand how the current market impacts the value of your property and if the timing is right, please get in touch with us. We’d love to hear from you.
