The yield appeal of Gold Coast commercial property in 2018

GOLD Coast commercial property sales more than doubled in the first half of 2018 to $667 million, buoyed by a number of big-ticket deals in the retail and hotel-tourism sector.

The total compares with $276 million in sales a year earlier and it was just shy of the record $715 million achieved in the first half of 2015.

Commercial property yields on the Gold Coast offer an attractive alternative to low returns from other asset classes.

According to research compiled by Ray White Surfers Paradise, retail was the dominant asset class by volume in the six months to the end of June 2018.

It accounted for 31.42 per cent of sales, or more than $209 million, with almost half that total attributed to the $90 million sale of Soul Boardwalk in Surfers Paradise.

Office sales over the period accounted for 7.1 per cent of the total, although this sector was constrained by a lack of supply.

Sales in hotel and tourism assets were boosted by the $82.7 million deal for the Watermark Hotel in Surfers Paradise. That lifted total sales in this asset class to just over 30 per cent of the Gold Coast’s commercial sales in the first half of the year.

Ray White Commercial Gold Coast director Greg Bell is forecasting a sustained period of stability across the market over the near term, driven by strong fundamentals that appeal to both end users and investors.

“While yields have tightened on the Gold Coast in recent years they remain a value proposition when compared to capital city markets,” said Mr Bell.

“That’s reflected in some of the major transactions recorded locally in the first six months of the year.”

“Retail remains the most active asset class by volume, but we are also seeing strong activity in the industrial, retail and office sectors for assets priced below $2 million,” said Mr Bell.

The industrial market, particularly strata-titled units, has been buoyed by demand from self-managed super funds as well as business operators seeking to capitalise on low interest rates.

“In many cases, interest payments are less than rent for business owners which is a key support for the strata-title market,” Mr Bell said.

Low vacancy rates, reflected in a fall in lease incentives, underpins the current strength in the industrial market.

The bulk of deals recorded in the first half of 2018 have been in the sub-$1 million bracket on yields ranging from 5.5 per cent to 8.5 per cent.

Ray White Commercial industrial specialist Adam Young said changes in consumer habits, led by the growth of online retail spending, are driving some sales. He forecasts demand for centrally-located warehouse space in areas such as Burleigh Heads, Molendinar and Nerang to remain strong.

“Warehouses of all sizes required on key transport and distribution routes, adding to the existing demand,” Mr Young said.

“This has even led to a shift by large investment funds away from shopping centres and broad-scale retail to include significant investment in industrial and logistics.”

Mr Young said the Gold Coast market was constrained by a lack of land for new industrial developments which was compressing yields in the broader market.

“We’ve also seen some record high sales on a per square metre basis for smaller industrial properties and industrial land,” he said.

Mr Young said retail has the added appeal of superior tenant covenants, particularly with national or big-brand tenants.

“Leases are usually secured on three-year terms at a minimum which offers a compelling story for investors,” he said.

He cites the recent sale of a single-storey property with three tenancies at 140-144 Griffith Street, Coolangatta which sold prior to auction on a 6.6 per cent yield.

“As an investment, this property was prime as it was fully leased, supported by three A-grade tenants with a mix of four-year to seven-year lease terms,” Mr Young said.

“The property also had excellent development potential with uninterrupted ocean view corridors.”

The office market has also made headway with yields compressing progressively since 2011.

The main constraint to the market currently is availability of quality stock.

“Good office stock is very tightly held, but if it is in a quality position with good tenants there’s strong competition when it comes on the market,” Mr Bell said.

The near-term outlook for the commercial market on the Gold Coast remains robust, although concerns remain over access to credit.

“This is obviously a concern across the market nationally and the Gold Coast is not immune,” Mr Bell said.

“However, we’re still confident that the Gold Coast will continue to benefit from solid fundamentals that have supported the market well over the past few years. Population forecasts are tracking strongly, which supports new jobs and demand for property in the city.”

The latest Australian Bureau of Statistics figures show the Gold Coast population is among the fastest in the country and that it could top one million by 2034. The city is currently growing at the rate of 21,000 people a year.

Despite concerns over investor finance, Ray White Commercial agents remain confident that market conditions are positive for the Gold Coast.

“I wouldn’t call it a boom, but the buyers are definitely there for quality commercial assets that meet the market’s expectations on price,” Mr Bell said.