The COVID-19 pandemic is an unprecedented shock to the rental housing market, reducing demand for rental properties at the same time as supply has increased. Households most affected by the economic impact are more likely to be renters, and border closures have reduced international arrivals. The number of vacant rental properties has increased as new dwellings have been completed and some landlords have offered short-term rentals on the long-term market, particularly in inner Sydney and Melbourne.
Government policies have supported renters and landlords. Rents have declined, partly because of discounts on existing rental agreements and it is likely that rent growth in many areas will remain subdued over coming years.
Commercial property can be a great investment, especially for investors who are seeking cash flow.
With residential rental yields continuing to decline as prices rise and borders remain closed, more investors are turning to commercial and industrial property to achieve stronger returns.
According to SQM Research, rental yields on houses in Melbourne’s Bayside region have fallen from 2.7% in May 2020 to 2.5% in May 2021, with units also declining from 3.9% to 3.4%.
The initial post-COVID-19 buyer focus in late 2020 was on “lifestyle-related” residential property and holiday homes, leading to surges in values over the subsequent six months.
The pendulum has now started to swing back to “returns and cash flow”, refocusing buyers back to commercial and industrial property. Yields on commercial and industrial property across Melbourne’s South East and Bayside regions are generally in the vicinity of 4% to 5%.
Affordable pricing, higher returns, tenants paying outgoings, all within a low interest rate environment are making commercial and industrial property investments add up.
As Victoria is a hub for national distribution activity, it comes as no surprise that Melbourne’s market will benefit hugely from a continued rise in demand. The unique combination of proximity to a major CBD, but with the benefit of significant amounts of real estate space within the outer suburbs, makes Victoria the ideal location. Large warehouse spaces supported by quality transport infrastructure can be located in close proximity to major company offices located within the business hub of Melbourne.
Another driver for the unprecedented demand in the sector is that capital allocation to the industrial and logistics asset class has now surpassed the volumes seen within the retail sector. This shows a material shift in investor appetites, with industrial and logistics seen as the key to stable long-term value and growth.
Trends like this indicate that demand is not expected to slow anytime soon. Vacancy rates for sought after warehouse and industrial spaces are not projected to increase in the near future. Rather, there is a projected chronic shortage of industrial and logistics space from Dandenong to Keysborough, offering real benefit to landlords.