“What’s fascinating is that yields are compressing,” said Burgess Rawson CEO Ingrid Filmer.
A number of factors were driving this, Ms Filmer said, most notably a “huge increase in cash buyers seeking returns on undeployed capital” and first time commercial property investors taking their money out of the equities and residential assets.
Also, a big driver, she said, were the very long leases on offer across most investments – the weighted average lease expiry (WALE) across the September portfolio was 10.7 years, compared with a WALE of 7.3 years at the August auction.
“Investors want to avoid short-term uncertainty. The longer WALE is changing investors’ appetite,” Ms Filmer said.
This contrasts with the institutional end of the commercial property market, especially in the industrial sector, where investors are seeking shorter WALEs, so they can bump up rents on new leases.
Highlighting the different dynamics underpinning sub-$10 million investments, a United Petroleum service station in Sunshine North, in inner Melbourne, offered at the Burgess Rawson auction sold for $3.15 million on a yield of just 2.97 per cent and 27 per cent above its reserve to a buyer who paid entirely in cash.
The 3260 sq m site sold with a 10-year lease to United Petroleum, but with fixed annual rental increases of 2 per cent, well below inflation.
Also selling on a tight return, was an Autobarn outlet in Mornington, south of Melbourne. This was picked up by a local business owner for $5.4 million on a yield of 3.77 per cent.
Of the 20 properties which sold under the hammer at Crown Casino, more than half changed hands on yields at or our below 5 per cent.
This included the 106-year-old Exchange Hotel in Port Melbourne, which was bought by mainland Chinese investors for $8.92 million on a 4.6 per cent yield and a BBQ Galore store in Launceston bought by a Melbourne investor for $3.845 million on a 4.23 per cent yield.
Of the 32 underbidders who missed out on the more affordable $1 million assets offered at the auction, Ms Filmer said most were cash buyers with money from their businesses.
Mark Wizel, co-founder of commercial property advisory firm Advise Transact, who attended the auction, said it highlighted “very adequate buyer depth for almost all properties offered for sale”.
“Clearly the strong underlying income and lease terms associated with a lot of the properties on offer is proving to still remain of strong interest to active buyers who have access to unreserved cash funds or who have confidence to blend their equity and obtain commercial debt to fund the purchase.”
Mr Wizel said seasoned commercial investors would not be too concerned about the rising cost of debt, given it was coming off historic lows and that “attractive cash flow positive opportunities are up for grabs”.