The fundamentals for next decade - Property Inc

 Inside Commercial Property with Rethink Investing. Australia’s largest and most comprehensive podcast covering all things commercial investing.

We cover all things commercial investing. Phil Tarren co host. Of Inside Commercial Property with Scott O’Neill, Director, Founder, Rethink Investing. The most popular and in demand person on the circuit these days that would appear around commercial property. You’re booming, mate. The profile, I saw some piece on your, uh, your internet the other day around all the stories that you’ve been in, uh, this year.

Uh, you and your business partner, uh, celebrities, um, uh, making headlines, uh, you know. Shaking up things. You like all that sort of stuff? Mate, you know I don’t. Look at you, teasing me in normal. No, it’s uh, I don’t know, it’s been busy. Busy the last few months. Um, but yeah, it’s uh, it’s good to be in an office seeing you face to face again, mate.

I know. I just get better, don’t I? Fine wine. Yeah. How’s your wing, by the way? We haven’t spoken about that. You, you, you heard it. I think we spoke about it last time we got together. It had a yarn. You’re looking alright. Yeah, no, it’s um, It’s got a, got a solid little scar there. Oh, he’s got a little band aid, looks like his child’s put on to it.

That’s the willow put it on yes, this morning. Yeah, yeah. Oh, that’s alright. Yeah, it’s just um, Yeah, they cut the tendons to get to the bone. So that’s the bit that takes a while to, to get sorted. So the bone’s all good now. Yeah. Um, but, yeah, they reckon uh, three to six months to uh, Before you can start putting like real weight on it, you know, you look like a reasonable Nick though, like, you know, you haven’t Piled on the kilos eating kebabs and Chico rolls while you’ve been out out of out of action You can’t do much upper body, but you still walk around and do all that stuff that yeah I’ve been a plenty of eating and drinking mate.

There’s not much else as well You know, this is not really a lifestyle and, um, uh, body, uh, podcast. We’re here to talk about, uh, commercial property. That’s why, that’s why you’re tuning in, no doubt. So, uh, welcome everyone. Hope you’re enjoying it. We’ve been at this now for, well, we’d mark two years. Would it be two years?

It would be. I reckon this is our two year anniversary. Yeah. It’s, um. It’s got to be close, right? Because we kick this off just as early. COVID really started to accelerate. I’m going to call it April or May of 2020, maybe. He’s looking through his phone now, trying to work it out. Look at this, on the flight seat.

And, you know, postscript, um, uh, gives you some sense for the, uh, this is not scripted. This is completely uncut. This, uh, this discussion I have with Scott O’Neill on… It doesn’t say how many episodes, but it said the first one was… June 2020. June 2020. Well, I’m not far off. Right in the middle of COVID. June 2020.

All right. We’re going to have to, uh, celebrate that with something, uh, at a point in time. And I still remember that first episode where we were like, okay, what is commercial property? It was real 101 stuff. And it, it feels as though we now have this, uh, base level understanding and appreciation. I think we’ve, um, uh, been quite beneficial to the community in, in sort of, you know, Um, raising awareness around commercial property is, um, to augment or even to replace, um, uh, investing activities from those people that normally sort of look at residency property, open their minds and their eyes, um, being quite considerate in our commentary around it as we’ve sort of navigated, uh, COVID 19, uh, as a nation, and here we are, Scott, in, um, March, uh, 2022, uh, recording the day after the federal budget was handed down.

I’m jumping on a plane tomorrow. Bye bye. Uh, afternoon, I’ll be heading down for the, uh, opposition, uh, response, uh, which is a, an evening thing, uh, where we’ll hear what the opposition thinks about the budget. You’re seeing some of that commentary coming out in the papers right now, uh, followed by the budget lunch, uh, that we host here at, uh, Momentum Media, which is, um, around the whole defensive national security space.

And that was one area which got some runs on, on the budget again, outside the scope of this, um, Uh, chat, uh, however, it just makes me think, Scott, of… Um, all these type of things which impact markets and impact the way in which property investors, commercial investors, uh, can build their portfolios and create wealth through commercial property.

Um, we talk a lot about strategies and tactics and asset selection and, you know, effective operation, uh, and administration of, of commercial property, all that stuff’s in your control. Um, that said, uh, as a commercial investor, there’s a whole bunch of stuff. out of your control and, uh, you could argue because we are, uh, one of the great democracies of the world and one of the pure democracies of the world because everyone in Australia has to vote, so therefore you probably get a more realistic view of, um, uh, who should be in power.

We all get to choose who’s in power, so I guess we have some control over that, but, um, how the election plays out, what the policies are, et cetera, largely out of our control. Um, then we look at the environment that we’re in right now, uh, Scott, we have, um, You know, European war, uh, a hundred years after the war that ended all wars, um, back into it.

That just seems to be escalating. Uh, there’s huge ramifications globally, uh, in relation to the war in Ukraine. Uh, the sanctions posed on Russia, uh, is having some impact. We’ll chat a little bit about that. But one of the big headlines around it is, uh, the rapid, uh, increase in, uh, fuel prices. And again, they’ve touched on that in the budget last night to try and alleviate and exacerbate that.

We still have the ongoing impact of COVID 19. What that means, one of the key, um, uh, sort of downstream, uh, issues for Australia with that is these ongoing supply chain issues. And we’ve seen this massive hike in, in the cost of materials. Uh, all of these Scott are a commercial property story because we’re all interconnected and entwined within it.

So these are the things out of your control. It’s how you go about. Maneuvering through them is what the best commercial investors do. Yeah, exactly. So, like the big key themes we’re seeing on the market is exactly what you said, supply chain issues. Um, that’s reflected in build costs still going up, time frames for building going up.

Um, it’s, it’s tough for anyone that’s importing anything at the moment at, at the right rate. So cost of living is going up. So, we’re in this high inflation environment, add the fuel. Uh, restrictions across the world, pushing prices up. That’s, that’s a political thing. You know, they look like they’re, uh, going to adjust some certain things in budgets.

Um, basically it’s cost more to move around. Um, also all the floods that we’ve had across the East Coast. Like we’re seeing that’s had impacts both for good and bad, uh, with commercial. So we can go into that. Um, and also, yeah, basically just how, uh, everyone’s still adapting to investing in these markets.

It’s, um. Uh, like the post COVID, and I say that word loosely, but um, post the Omicron, um, surge is businesses, cause businesses got hurt in that surge because it was almost like when we’re all allowed out, it was an unofficial lockdown, you know, people actually didn’t go out. So small business suffered at that time, particularly in places like Queensland, you might see it in WA a little bit at the moment getting their first wave.

That’s, um, we’re coming out of the other side of that for many businesses, you may see the CBD starting to pick up again. So, uh, it’s a new environment, um, for the positive overall in those areas. But, um, but yeah, there are some negatives as always. So you’ve got to be careful as a commercial investor to, to navigate it.

Absolutely. And we’ll chat briefly about the floods. Um, to your point, Scott, the, the sort of first round of COVID, we think about that, um, around this time, two years ago, uh, the, the head, the headline sort of focus of that was on, um, Uh, the doctors and nurses on the front line, uh, combating COVID at the time when there’s a lot of uncertainty around what it all meant for Australia, uh, they, um, worked passionately through that period of time to, to support from the, the health, uh, crisis.

And then also at a professional sense, um, accountants were the, essentially the doctors and nurses for small business. Uh, they were there on the front line helping small business, helping business in Australia. Uh. Uh, understand the stimulus package that are available to them and helping steering organizations through that and not to get political, um, I, I would, I would say in a university, I think most would say that was a good bit of policy that the government put in there too, rather than, than giving people welfare, they went, let’s just keep Australians working.

It’s really, really good. This is a commercial property story. Absolutely. The second sort of phase of COVID and that’s been the most recent one, which has been, um, Uh, the, the, the spike in the shutdowns, uh, in relation to the, that latest outbreak. Um, we think la latter part of last year in the start of this year.

Uh, Scott, the headline sort of focus of that was really around the retail sector and impact on retail sectors, restaurants, and all that sort of stuff. But sitting at the background of all of this is the supply chain that supports the nation and supply chain is essentially basic terms stuff that people need to do things with.

And in a business sense, um, uh, it would be. Beer that goes into pubs. It would be food and produce that goes into restaurants. It would be gyprock and sheet metal and cement that goes into building stuff. So this is, the big part of our economy is getting this stuff moved around, taking it from A to B, getting into the nation, warehousing it and pushing it out to those people that need it.

It’s a commercial property story. So these are all the things working in unison as we speak right now, which are impacting how you should be thinking about and going about investing in commercial property. It’s got to go quickly to the budget. Um, they always like doing these winners and losers of the budget and whether or not, and start thinking about this as I sort of go through a bit of this.

Whether or not commercial property investors are winners or losers in the budget. One of the big winners are motorists. Um, you all know this if you’ve been tuning in with it, that the government’s gonna just, um, uh, reduce some of those sort of fuel exercise levies to try and bring the price down. So essentially the government’s gonna take a haircut because they’re gonna take less tax on, on, on fuel trying to keep the price the same.

Taxpayers, sort of, uh, lower middle income people, they’re gonna get some breaks and stuff, that’s all pretty cool. Uh, women, winners in the budget, which is great. And also blokes, I like to think around paid maternity, they’ve had to rethink about, uh, that. Regional Australia, uh, winners in the budget, uh, they’re talking about sort of, um, new energy security and regional development plans, money going into that.

So look out for commercial property in those regional and rural areas potentially. Um, some welfare recipients sort of, um, they’re up in the game on everything. First time buyers, um, again, up in the game, stimulus to try and get them, um, Uh, into property earlier, sooner, uh, with less requirements around, um, how much deposit they need, whether they’re couples or, or, um, a single parents.

Mental health, one of the winners of the budget, cyber spying. Uh, I think we spoke about it last time with this stuff going on in Ukraine. Um, the, the, the PM warned about. Cyber influence, um, cyber reprisals from, uh, Russia, that’s a big part that it’s going to be, um, looking into. Losers, tax evasors, uh, losers, draft beer retailers, i.

e. commercial property, uh, losers, wages. So, you can go and look at all this stuff online, um, but this is, you know, a lot of people with a budget, they just go, Oh, I just find it so confusing, does it really mean anything? They’re just promises and they don’t normally happen. Maybe, maybe not. Um, is commercial property winners or losers in the budget, Scott?

Look, I’m gonna be pretty on the fence with it, like all that stuff is fairly benign for, for commercial property, like there’s, there’s no… Big winner out there. Like I think commercials kind of, it’s kind of getting pushed along by the general economy a lot more than, as you said, potential promises, um, for either side of government.

Um, there’s no major, uh, thing in there that’s just going to add value to a commercial property or, um, Nothing material at least. There might be some sentiment directions caused by some of that, some of that, but things like increased budget spending will help towns that rely on defense spending, you know, so maybe some of those northern towns like Darwin and Townsville that could see some beneficiaries of that.

It’s, uh, you know, things about sort of cost of living and all that, like inflation. is going to be one of the great themes of the next half decade, I think. And, um, that’s going to be really good for commercial investors. Like, yes, it’s going to be bad on the side that interest rates might go up slightly, but, uh, your rents are going to go up before that happens as well, because CPI is going through the roof.

Like, I looked at the numbers of Perth CPI. Uh, year on year, it’s 5. 7 percent, according to, uh, whatever website I’ve Googled this morning. So, 5. 7 percent. If you’ve got a CPI increase in your rent, You’ve immediately got 5. 7 percent more rent. So that’s, that’s pretty huge, you know. It’s going to be a lot more than any, you know, marginal increases in interest rates, right?

Yeah. Like if, if your debt 70 percent and your interest rate goes up, you know, a quarter of a percent, but your rent’s gone up 5%, you know, and that’s, you know, to do with 100 percent of the asset. It’s, um, yeah, it’s, it’s almost a different ratio of, uh, of increase. Yeah, you will benefit more from increased rents than the cost of it going up, I think.

Inflation just has to keep going up. So if its interest rates are changing for different reasons, that’s probably more of a concern. But it’s, um, yeah, there’s no real big surprises in that budget. I think, uh, I think the theme is it’s still going to be a place where people have cheap money to spend. Um, And there’s not many good places to put it in this economy, and the budget’s not going to change where you put your money, other than, uh, you know, there’s going to be some winners or losers, some people will feel like they’ve got less, um, but, um, yeah, like tax evaders and stuff like that, that, you know, depending if they play around with structures of entities, putting on property, you know, sharing, uh, discretionary income, all that kind of stuff might have tiny little impacts, but it’s all fringe stuff.

Yeah, it’s all fringe stuff. So, yeah. Be across, be aware of all this, but don’t get too absorbed in it, um, uh, these are just, you know, they’re ideas, they’re policies that should convert into action, should the current government stay where they are right now, and, um, I, I’m of the understanding that there should be a date announced, um, um, pretty soon for, uh, the actual federal election.

So we’re going to be in overdrive now between this period of the budget being handed out and election. There’s going to be a lot of politicking out there, uh, both sides, um, and, and, and all, um, MPs, senators out there doing what they do, trying to keep themselves in a job. Um, how it plays out, who knows, uh, I’ll, I’ll have some sort of feedback when I.

Come back from Canberra later on this week to see what the, the opposition, uh, is up to. But you look at these factors, Scott, which are shaping decision making commercial property and, you know, how, um, events that are happening tens of thousands of kilometers away. Uh, impacting Australia at a very practical level and a very visible level and universally impacting them by that.

I’m talking about, um, petrol prices, uh, as a, as a result of the war in Ukraine. What happens there? Who knows? Um, if, if you’re not too up to speed with it, I suggest you just have a nose around it. Some good commentary around it. Um, my view of it, the, the, the Ukraine situation, the Russian invasion of Ukraine, there’s a number of different ways it’s going to play out, um, either Russia will be victorious and, and achieve their aims, but no one yet really understands what those true aims are, uh, it’s either going to bog down into the quagmire or say the quagmire that is right now akin to, uh, Russia’s, uh, intervention into Afghanistan in the eighties.

It’s probably what they don’t want. Uh, the Ukrainians might be victorious. Who knows? Um, yeah. The most likely outcome is not going to be, well, it’s going to be a negotiated peace, but I think it would just be some level of, uh, Ukraine, um, um, sort of independence, some sort of Ukraine neutrality, uh, akin to what, um, uh, Sweden and Switzerland are, uh, Russia just doesn’t want to have NATO on their doorstep.

Um, and do yourself a favor and I think that Scott, I don’t know if you did this, uh, uh, I remember it vividly. Um, I think it was year seven geography where they said, uh, get a bit of tracing paper. Uh, get a, get a, remember the old Atlas you sit over at school and they said trace, trace around Australia on tracing paper.

Now put that over Europe. I remember like going, wow, like, you know, Australia, like you can fit. Europe inside of Australia from, you know, Ireland all the way through, um, uh, into the, to the then Soviet Union. Uh, it’s a… You know, Australia is a big place, but Ukraine is one of the largest countries, uh, globally.

Um, particularly one of the largest in Europe. So this thing’s not going to end, but how and what impact that has on commercial property. Now you can look into this and whether or not you should be going this deep. Fuel prices are increasing, which means that things are going to get more expensive because it takes longer.

and will be more expensive to move stuff around. So we talk logistics here, trucks, couriers, all this sort of stuff. Should you be concerned about the viability of your commercial tenants? Who may be squeezed in terms of margins, may be squeezed in terms of jobs, may be squeezed in terms of their ability to meet their, their requirements as a result of these type of factors or movements.

It’s, yeah, it’s a very deep question because there’s many layers to it because the, although like logistics, uh, everything that’s happened in the last few years has really helped industrial properties. It’s been, COVID has been very, Kind to anyone that owns an industrial property. Uh, it’s just because there’s more online sales and there’s more storage.

The supply chains are more inconsistent. So when people purchase things, they purchase large quantities of them, store them for longer because they don’t want to regularly buy and the cost of a shipping container has gone up. So that means you’ve got to order, uh, you know, more or less depending on how your business is structured.

But, um, the building costs have gone up too. So they’re not building as much stuff because developers margins weren’t there. So. The general result on the ground is industrial vacancy rates have dropped to almost their lowest ever level. So we’re seeing rent growth. So, it is helping, all this stuff. And now, how would fuel impact all this?

The cost of outer suburb industrial properties further from your logistics hubs might be less valuable. Um, your inner city or the ones next to the airport or marine port are going to be more valuable. So, distance or, um, distance to the actual customer is going to be just so much more important. Um, again, look with how long will this fuel issue last?

You know, not too sure, but it looks like it’s not going away in a hurry, but well, it looks like the government’s going to fix it just by taking a haircut on, on the tax excise to make it at least a bit affordable to try and combat some inflation. And it’s this issue with Ukraine ain’t going away quickly.

No. And like you said, there’s a few different. potential results of this war and, uh, none of them seem fast, you know, like if, if it just bogs down to the quagmire, as you mentioned, this could drag out for, who knows? Um, you know, there’s, there’s people that, you know, making decisions over there that, Normal people can’t predict, so this could go on for quite a while and, and yeah, there’s, there’s almost a bit of a decentralization in this globe happening at the moment.

So company or countries are looking within themselves to be more self sustainable, like this opening of the economy or the world, which has been one of the results of the last 10 or 20 years, seems to reverse quite quickly. Um, you know, the likes of China, for instance, uh, you know. With Australia, like relationships aren’t as good as they were and like politically, that’s sort of what many countries are doing.

Um, cause it’s popular with the voter base, I guess. And even our state borders all getting closed up and it was proven to be quite popular. Like I think 75 percent of odd people like that and 25 percent didn’t. So decentralization is. It’s a key thing for commercial property because, um, it, uh, it, it’s restricting the flow of people.

People are sitting at home longer, working from home. They’re not, um, you know, especially when COVID was doing the rounds, they weren’t, they weren’t going out and shopping as much in their local stores. Um, so yeah, it’s been fascinating for commercial property, but, um, people, because they haven’t been.

Having as much downtime or leisure time with holidays and that, they seem like they’re prioritizing investing capital and maybe sorting out their income because their job security wasn’t going to be there as much. So, yeah, a lot, a lot has been, a lot of unpredictable things have happened, I, I would have thought from, from all of this.

Yeah, and this is, this is really where international relations, globalizations, global economies, um, uh, intersect with You know, nationhood intersects with, um, Australia and what does that mean for wealth creation and making the right, you know, investment decisions around commercial property, which this is.

And you mentioned a point there, um, you know, this reversal, look at, look what happened with Brexit. Uh, the POMs have gone, yeah, we want to be part of Europe. They’ve had a relationship, a formal relationship with Europe for, for many, many years and they’ve. Pretty much voted the game. Yeah, you know what we sort of just want to sort of Nick back over here we’ve got this big ditch in between Europe and we just want to sort of Hang out amongst ourselves now and try and find other markets and they’ve obviously looked a lot closer towards on their natural Relationships with Australia and and the US we have this new orcas arrangement Which is a more than just a defense and security arrangement something much more But this point you mentioned Scott around And again, I was just thinking on, you know, all these things and how they work out, but what does it mean for commercial property?

And you’re probably not going to get this sort of commentary elsewhere. Um, this is quite sort of specific to this show, but, um, you, you might have heard of this, this notion of, um, Sovereign industrial capability, um, critical infrastructure and, and, and the budget, you know, they’ve, they’ve ponied up the Australian signals directorate, um, that they’ve, the government is sort of channeling, uh, quite a lot of money into beefing that up.

And, you know, it’s one of the five domains of warfare, you’ve got air, land, sea, space, and cyber, right? And they’re pretty much going, well, cyber is the. tether is the connectivity for all of Australia right now. And again, it has supply chain ramifications. Then again, it has commercial ramifications, but this notion of sovereign industrial capability, which is the concept and it should be part of your investment decision making, which is part of the concept of saying Australia should be.

self sustainable. Australia should be able to sort itself out irrespective of what’s happening around the world in its sphere of influence, particularly in the Pacific, but wider and globally in Ukraine. Australia is participating in supporting Ukraine through, through cyber, um, talent and capabilities.

But what does that mean for how Australia moves on as a nation? And, and what I, what I feel as though it means is that, um, And, and I’ll preface this with, I think there’s a universal understanding of both sides of politics of the need for this. So, they’re actually on the same page saying, we need to think about Australia first.

So, we need to think about Australia first, we need to channel money into making sure that we can make the things that we need to make in order for us to look after ourselves, which is good potentially for advanced manufacturing, uh, in Australia, which is good potentially for where that happens, and that happens in commercial premises.

So. Commercial property is intrinsically linked with this notion and this concept around sovereign industrial capability and critical infrastructure. Just last week Scott Um, the Prime Minister, um, uh, was there to open a new cyber security center in Ryde here, which is essentially, it’s sovereign, as in Australia owns it, it means that these are our, imagine a server, okay, imagine like a million of them all wired together.

Uh, with WISE, that there is a critical infrastructure that is part of, um, uh, the process for driving Australia forward, moving forward. That’s a commercial property it lives in and everything connected in with that is commercially orientated. So this is his intersection, sovereign industrial capabilities and commercial property.

Are you seeing anyone even sort of contemplating that yet, thinking sort of 30 years ahead in terms of the sort of commercial assets we’re going to need and what you should be investing in? To a degree, yes. Um, but look, Australians, I find like a lot of my, um, Asian market clients. So, so we’ve got a lot of people from, say, Singapore, Hong Kong, investing in Australia.

Um, more and more by, by the week it seems. And they think differently. They’re, they’re much more long term than for us. Like, so they like things like agriculture land, um, data centers. Um, you mentioned something, uh, uh, before when we got on today, like. Uh, things like regional areas where they might introduce Starlink, for instance, where they’ve got better internet capabilities in regional areas and, um, and all of a sudden, I don’t know what it is, but a lot of those, uh, particularly Asian, um, continent type clients are considering regional areas.

Normally they’re just CBD type markets. Um, but they’re, they’re obviously seeing, um. Non CBD markets is a really good option these days. So these are all in responses to some of these themes you’ve mentioned. But, um, but yeah, look, local manufacturing is coming back online in Australia and it’s a good thing because I don’t think anyone likes seeing the likes of Holden and Ford and all that just exiting because that would have been a weakness for.

You know, the manufacturing sectors of, you know, Adelaide, Geelong areas, you know, they left these big voids in the economy. And, um, one of the things the government’s trying to do is replace them with more techie type jobs. And, um, and that’s really good news for commercial investors. Because you don’t want the industrial areas of the world to become like parts of Eastern Europe after the Cold War, where there’s just big vacant warehouses and ghost suburbs and stuff like that.

Um, it hasn’t really happened in Australia because it’s been replaced quite well. And, um… But local manufacturing is probably the biggest theme and like you said it might be more high end type manufacturing but um, it’s, it’s good for local jobs, it’s good for wage growth, it’s good for um, vacancy rates, so you know, it’s basically just increasing GDP.

It’s increasing GDP and this is a repurposing you’re seeing of these sort of more traditional manufacturing areas for large scale manufacturing right, um, the Holden plan for example, um, you know, the state governments are looking to attract They’re lobbying, they’re trying to attract, uh, both large businesses and government spending into these areas.

Fisherman’s Bend, for example, would be one of those, uh, case studies. Osborne, the shipbuilding facility there, like all the states fight for this dollars so they can build out these local, um, uh, manufacturing capabilities, which again is a commercial story. Like everything comes back to commercial and it’s nice to actually sort of just keep pulling on that string and actually understanding like all these different areas you mentioned and it come in the budget.

Um, Uh, the government is, is going to pony up more money into regional spending. Uh, more Australians have now realized, uh, that regional Australia is a good place to be. It’s been accelerated, I think, uh, uh, through the COVID pandemic and to what you spoke about, you know, the fact that high speed internet is now available in these areas is a game changer.

You know, it’s cheaper to live there, cheaper to buy housing, your money goes further, you got happy punters, uh, happy workers, right? Again, it’s a commercial story. Yeah, and that’s one of the great opportunities we’ve seen for Outlook and helped our clients into. So, you know, at Rethink Investing, we’re very wary that quality is the number one factor when it comes to commercial property.

You don’t just go somewhere because it’s cheap or because the yield’s great. That’s the, you know, it’s one of the greatest mistakes you can make. You’ve got to get a good, reliable yield, something that could be re tenanted, something that’s going to be… relevant for a long time and regional areas, um, especially major regional centers have been, you know, shunned over the years in terms of, you know, they’ve been out of sight, out of mind.

And now there is actually disparity between the prices in the city versus what you can get in regional areas. So the yields are still very good. So there’s value for investors. And as the investors are seeing these value, they’re, they’re pushing prices up. So we’re seeing rapid capital growth in these markets, but the stability of tenants is often greater as well, because there’s less.

supply, there’s less competition, um, from, you know, developments, new stuff coming up. Um, you know, I, I think it’s a really good opportunity. And now that there’s better infrastructure and more support for regional areas and, um, and more buy in just from the average punter who wants to live there now, not having to live in the CBD and think that’s the only place to live your life.

Um, yeah, there’s massive opportunity and yeah, I’m, I’m. I’m a big fan of good quality regional areas from a commercial point. And that’s the key point, good quality regional areas. As we speak today, uh, Scott, we just had another significant weather event on the East Coast of Australia. Saw some pictures of Byron Bay, the main drag of Byron Bay, underwater, all again.

It’s a commercial story. All of those SMEs, fish and chip shops, boutiques, I don’t know, the fancy places you probably go shopping. Uh, again, uh, huge, um, uh, warnings for, for Lismore, which just got battered a couple of weeks ago. Um, the, the, you know, we’ve all seen the pictures of, of the high street there of, you know, water levels up to the awnings of, of First Story Lake.

Again, it’s a commercial story. You’ve got to make sure you’re buying the right stuff when you’re looking to invest in regional towns because these weather events have been happening, they will continue to happen. Australia is the land of extremes, droughts and flooding rains and all this sort of stuff.

I had a channel of that great poem that we all learned as kids. So yes to regional areas, but by beware. Yeah, and, and sort of double down on that flooding point. So all these councils have one in a hundred year event maps out there and they’re very, very good maps. Like they, they tell you to the millimeter or, you know, close to where the floods went to, but that one in a hundred year event seems to happen one every 10 years at the moment, um, just with what we’ve seen.

So I guess. What people are doing is once they, and I saw this just before the recent floods this year, that a lot of people were starting to ignore the, say, the Brisbane one in a hundred year of flood event, because, yeah, it was 2011 since the last one happened, you know, this era of new investors probably didn’t remember it, or it was a very distant memory, so they started buying, um, you know, talking about commercial property, shopfronts, and industrial properties in flood zones, because a lot of industrial properties are in flood zones because it’s cheaper, larger land and you know, um, and tenants were happy to rent them, but now they’ve just got smashed again, you know, up to the awnings and the flooded properties all of a sudden, which was starting to catch up to the value of a non flooded property.

That’s reversed because no insurance company wants to touch it anymore. The cost for the tenant to pay the insurance, because remember, um, tenants pay it. building insurance for the landlord. It’s now more expensive for them to live and, you know, if they’re only getting a tiny benefit on the square metre rate to live in a flood zone or rent in a flood zone why would they want to do it?

So now there’s a two speed market back. So the flood free properties are more in demand than they’ve ever been because there’s all these displaced tenants trying to get into the non flood property because the last thing they want to do is disrupt their business again. Go through the cleanup and throw out stock.

It’s a horrible, horrible situation for any business or person to be in. Um, so why would you want to potentially risk that again? Because this one in a hundred year event could happen next year again. Like it’s just. Who knows what’s going to happen, but places like Gympie went right under, places like Lismore you mentioned.

So imagine you’re looking to buy a commercial property and it’s in a 20 percent flood zone. You probably couldn’t even get finance for it anymore. So the non flooded properties will see a boost, and that’s why at the start of this program I said good and bad for flood. Um, yes, it’s overall bad, but if you own or are targeting a non flood property, you’re probably going to actually have some displaced tenants wanting it more than they once were.

You know, three months ago they weren’t thinking about moving, now they are. And then, uh, if you’re unfortunately ignored the flood line. um, and brought in a severe flood area, uh, it’s, it’s going to be harder moving forward. Um, and just be careful, not all zone flood areas actually flood with the council too, you know, because there are some factors of safety they often put onto the, um, flood maps as well.

So, and sometimes large partial of land might only have a portion of it flood. So, you know, you just got to look into the flood zones quite carefully, because it will have a big impact on your reliability of the property. You’re revaluing the property and all of the above, it will, it will change the outcome now more than ever.

So there’s a, you know, thanks for joining us. We sort of navigated discussion around all of these things that you, as a commercial property investor, you cannot control conflict in Ukraine, fuel price hikes, COVID 19. Floods, elections, budgets, uh, all this sort of stuff, but, uh, how you choose to use that information, um, to make tactical and strategic decisions is, is what it’s all about.

And this all comes back to the market level, right? You know, where should you deploy your money today to get the outcome that you want? Most commercial property investors I know want yield and capital growth. Um, there’s a misnomer, and I think we probably spoke about it really early on in, in this series, Scott, where, um, there’s perception that you invest in commercial property just for yield.

You don’t get capital growth in yield. I think we’ve pretty much sort of quashed that. Um, so that’s what most people want. But where do you deploy money any point in time? So this market today, Scott, let’s quickly go around the grounds, uh, while I’ve got you here. Um, give me just a sort of 101. What are you seeing in these different areas?

Uh, let’s start down in Tasmania. Good for commercial property. Yep, one of the uh, beneficiaries of COVID and um, just this whole, I guess, theme about that, that strong regional centre, that’s Tasmania to a T. Um, And that’s just not home, that’s a place like Burnie. It’s like a, you talk about defence, it’s a big defence sort of thing in Burnie.

Burnie’s a place we, we, we targeted many times. Like it’s a very low stock market, so especially when you talk commercial, it’s not like there’s a hundred to choose from. Like you might get one or two. per month or per six months come up. Um, Launceston, Hobart, um, Davenport. These are, these are all good centres, um, very stable markets, but they are on the growth phase.

A lot of people from Melbourne move there, uh, early on, you know, get out of the long lockdown situations they were in, get a bit of land, you know, while they’re out there, go visit your cafe. The local cafe does better. The local supermarkets trade go up. Everything sort of, um, has been pretty healthy in those markets.

As a result of that yield. dropped been a lot of capital growth. Um, you know, a lot of the leases down there sort of fixed 3%. So, you know, as CPI grows, rents are going to fall behind. So there might be some adjustments in, you know, through market reviews and that pushing rents higher. So yields can be quite low down there relatively as well.

Like, you know, you can get into the 4%, but generally, you know, we’re sort of around 6, 7%, maybe just over type yields. So they’re you know, across the country, but, uh, it’s a pretty hard fought property. down there because there’s generally a lot of others on it so such low stock that’s the problem not many people want to sell down there because why would you it’s So it’s okay to pay a small premium on the way in because of the longevity, you think, in the investment?

Yeah. And I think that’s the theme with any good investment at the moment. Like we, uh, you know, it’s a growth phase. So it’s like buying in Sydney or Melbourne when it’s booming, you might go, Chuck the extra 20, 30, 50 grand at it, um, because you know, it’s a good longterm hold, but with commercial, you just got to be careful with that because like we’ve said it previously, there’s a lot of, there is a two speed market.

Like when you go to those auctions and we won’t name the company names, but they will. They will sell stuff 30, 40, 50 percent higher than what it’s really worth. And people are lining up, like there might be 10 backup buyers, and you might say, oh, that’s, that’s what it’s worth because that’s what someone wants to pay for it.

Well, you can buy them through other methods a lot cheaper, so. You know, I guess maybe we’re buying it under market if you’re doing it that, but, uh, you know, like the child cares, your servos, like a server, service station selling at a three or 4 percent yield, like, I don’t understand that as an investor because you can get a 6 percent yield for an asset that can be easily re let with probably more capital growth on it.

And less long term risk because fuels potentially not going to be as a prominent, you know, in, in 10 years time. So yeah, Tassie strong market, um, sort of absorbed a bit of the weakness that Melbourne faced last year. Um, but Melbourne’s on the way back too. Well, let’s shut up. Let’s go north and then clockwise Melbourne, which, which people are calling the resi.

the residential boom is over, uh, whether or not Melbourne got the boom. Um, uh, so that’s all said and done. Commercial property? Um, so Melbourne yields, you know, they can, I’ve seen some like streets, uh, you know, some, some of those kind of main road shop front sell at sub two percent net yield. So Melbourne historically has the lowest yields in the country and that’s one of the reasons why I’ve invested there less than anywhere else in the country with my clients.

We, we like good yields and Melbourne has a culture of accepting lower yields. And I think it stems just from, it’s a culture thing. So there’s less. Less renters, even in the resi markets. People are programmed to think, go buy your house. Renting’s dead money. Like Sydney, renting is just a way of life for many forever.

For most now. But Melbourne’s now catching up to that theme. But yeah, you don’t rent, you buy in Melbourne more so. And I’m generalizing, of course, there’s thousands of millions of exceptions to this, but that’s more of a theme we see down there. And that contributes to people paying more than renting, you know.

quite low. Um, you can get as high as say five percent down there, but it’s probably a bit of a sketchy five percent, like fringe industrial property. There might be some land out there where they’re going to build another thousand sheds. So you’re going to be careful with a high yield in Melbourne because supply will be your, your risk relay.

Um, and as you go north of that, so you’ve got all your regional, um, big Victorian places like Bellary, Sheppartons and Yeah. Great place to invest. Uh, they’ve got Yeah, concessions on discount, but they’re hardly for properties too. So, you know, we, we bought, you know, like a row of shop fronts in Ballarat. We got that at a, about a, just under 6 percent net yield.

But then they saw one down the road at 4. 9. So the market was compressing under our feet as we, we saw that in compression. Remember, it’s just people are paying more. So the yields are lower. So that’s capital growth. But yeah, if you can get a good yield in those areas, they are going to. It’s a good quality market, just got to be wary of future DAs.

Like, so if you go buy a childcare in Bendigo, you just want to look onto the online development portals, make sure they’re not planning another three, three to stick in there. Cause, um, development will always. be a potential risk for an area like that if it’s doing well. Capital growth builds in builder’s margins.

Remember that as prices grow so does the resale value. So there’s more reason for people to build as markets grow. Um, similar theme, I’ve always found the New South Wales towns a little bit slower than the regional cities. Like they’re, It’s maybe because they’re spread out more or I don’t know, maybe there’s more of a focus on Sydney, but, um, they’re a little bit smaller in general until you get to the likes of Wollongong.

Wollongong yields are very sharp. Um, that’s Sydney money, basically. Same with the Central Coast. Exactly. Central Coast, Newcastle. Yeah, we’ll get to that. So let’s go clockwise, so the Radelaide and, uh, the surrounds and, you know, um, Uh, diverse economies down there, but you know, driven big defense economy, a bit of culture down that way, again, all commercial stories.

Um, what do you think of Adelaide? I started investing in Adelaide in 2015. Back then, it was viewed pretty risky to go into industrial, you know, it was, uh, you know, the local manufacturing is coming off, vacancy rates are increasing, like it was a very good yields back then. Um, but now it’s, it’s. Very tight, like it’s, it’s a very strong market there and um, yields are probably on average for us, probably five and a half to six net.

Now that’s no stamp duty if there’s commercial property there. So you get normally a 0. 2 or 0. 3 benefits or a, you know, a 5. 7 net yield in Adelaide is really a 6%. for Queensland or WA because you don’t have to cover that extra cost of stamp duty. So that’s good. Um, but yeah, tight vacancy rate, um, shops down there are quite strong, not much supply risk versus other parts of the country.

So good market. Um, you know, probably look at five to 6 percent as your, as your yield range. for the average decent asset. Now going to Perth, um, big fan of Perth, like that’s becoming, uh, it’s our second most prominent market to invest in, um, behind Brisbane. So let’s just do a real quick summation on this, a spoiler alert, where we’re considering, I’m considering a purchase out there, which we’re going to get into next time myself and Scott get together.

So we’ll, we’ll double down on Perth then, but just give me just top line. Perth market, the economy has been very strong from basically, uh, all the, all the benefits of the mining. Boom, the amount of money they’ve got in the coffers up there is quite strong. A lot of infrastructure spending, borders have just opened.

COVID didn’t really hurt that market. Um, you know, there’s, so retail is strong over there. Um, they’re, you’re coming off a very low base. This is why I like it because I’m, I’m quite a. I’m an investor that likes playing the cycles. I want to get in early in the cycle and ride it up. You know, I don’t, I’ve never liked getting in too late because you’ve missed the boat.

So that’s why, you know, somewhere like Melbourne I might feel like I’ve missed the boat a bit because 10 years ago was a great time. Um, 10 years ago, Perth was worth more than what it is today. So you’re getting in at a discount. And, um, the average income up there is higher than Sydney and Melbourne. The vacancy rates are like tight.

The, the resi markets firing. So there’s a wealth effect getting created from the ground up there. And, uh, now that borders are open, there’s more people that can come in. They’re desperately needing more workers. Um, like we’ve bought things like, you know, some childcares and stuff and, and they can’t even get workers out there.

So they’re like, they’re in desperate need for people more than they’ve ever been. And, and that. If, if depending on what policies are announced, if that brings more people in town, like they’re just going to get absorbed immediately and they’re going to be extra people in the economy spending money. Um, but you are, I’m seeing rents quite cheap per square meter.

So, remember one of the ways to value a commercial property is, is the rent value. And if the rents are too cheap, and you know there’s room for rent growth, that’s future capital growth as well. So, you can go buy an industrial property, a really good quality one, renting for a hundred bucks a square meter.

That same property in Brisbane might be 150 a square meter. So there’s a 50 percent difference in price between two equally sized cities. One’s just a little bit probably been hit a little bit harder from growth because it’s proximity to Sydney or maybe there’s, you know, many factors why they’re different cycles, but um, there’s room for more growth.

That’s the key message. So if you’re buying something that’s got, uh, you know, under rented. The price is a cheaper square meter. You’re buying below replacement costs potentially. It’s just got all sorts of recipes for future capital growth. And um, I know your residential buyers agents you speak to a lot of them are active in that market as well.

Like all these experts are seeing this market as a, you know, as a, as a Yeah, a really good option. And I listened to a podcast, one of your guys, um, you know, who lives there, who specializes in, uh, residential was talking about all the different mines that are operating over there and different, um, yeah, there’s just many layers to that economy that to me shows it’s early on in the growth cycle.

So, um, two years ago, didn’t like it. Now we do. Okay. Well, we’ll get into that next time we get together. Darwin, Palmerston. Thoughts. So, this is one of those great areas for me because it’s just an area we haven’t invested much in. And I think because we’re, like, it doesn’t mean… It’s, it’s been a bad one.

Look, it’s almost like a similar trajectory to, to Perth, like it was worth a lot more and then it dropped a lot. There was a lot of apartments they built, but it’s, um, from a commercial point of view, it’s very low stock. So, um, it’s been out of sight, out of mind for us to a degree, but yields are pretty good.

Um, but it’s a local economy that will benefit from defense spending and, uh, all of the above up there. But, um, I still just feel like it’s a little bit out of my personal comfort zone, but, um, but yeah, it’ll be something we’ll be looking more into over the next 12 months. Yeah, I must admit I’m very, very much the same and, uh, I was up there a month ago, um, I hadn’t been to Darwin for 20 something years and it was good to actually go and put boots on the ground and, I had a good nose around and get a sense for the place and I was like, Oh, okay, you know, it’s been out of sight, out of mind.

So, um, yeah, consider it. It’s, um, do a trip up there. It’s great place to visit, by the way. Um, go and see Crocosaurus or somewhere out of there on Mitchell, big crocodile, whatever it is, but that Kakadu and all that sort of stuff. It’s good. But lots happening, um, in terms of, um. Uh, business up there, particularly, uh, connecting with the defense and national security sector.

You got, you know, the Marines there, sort of U. S. Marines doing a lot more, that’s going to grow over time. So, um, uh, place to watch, uh, Queensland, Brisbane, um, and then you’ve got sort of outer, sort of more regional areas from Ipswich to Womba to Rockhampton, Cairns, Townsville. Thoughts? Yeah, so North Queensland, it’s going very strong.

Like Cairns is a… Much more tourist city than Townsville. So, Cairns has some weakness, but it is, um, it’s coming back online that, um, on a commercial front, if you buy a property in Cairns, you want it to be supported by the local economy, not the tourist sector. I feel in this plenty of examples of that, like, you know, a local supermarket in a suburb has been going very well through those, uh, through those markets.

Yields are still good, which is an opportunity for an investor. They’re not, they’re not building much because you’re buying below replacement costs in most cases. Um, Townsville is a similar theme except there’s, um, it’s more of a worker city. It’s bigger. I’m a big fan of Townsville. We, we, we’re very active in that market.

Always buying off market in that market because online stuff has… Um, a lot of, uh, you know, a lot of attacks from other buyers, so you end up paying more. So that market is, um, again, a below replacement cost market. Um, you know, we, we bought a larger one the other day, which had about 6, 000 square meters of industrial sheds and we bought a 40 percent below market value.

So until values increase 40 percent in that example, there’d be no competing stock for that property. So it’s, and that’s not even including land price as well. So there’s room for that market to grow. Um, that, that market suffered in 2019 when they had the cyclone up there, so some retail shops in flood zones have taken quite a while to fill up there, but non flood, uh, centres are, they’re the first to get filled as well, so retail is getting strong in that market.

Um, office market in a, you know, it’s, there’s not huge amounts of office to be honest, but just suburban office is all. Much better than it was 12 months ago. Yields are compressing quickly as a result. A lot of investors, as you go south, um, places like Rockhampton and, um, you know, like, yeah, no, just south of that, you’re looking similar themes.

It’s just a lot more investors coming from Southeast Queensland up to those markets. Cause they’re like, well, the yields are relatively strong, very stable economies, you know, backed by agriculture and just good strong. local fundamentals like healthcare and service industry jobs and uh, yields a, a, yeah, there’s really good value there.

So I think there’ll be great capital growth for the likes of those cities as well. Um, because Southern money is coming harder than it ever has to push prices up and that theme won’t stop this year. Southeast Queensland, we all know this market. It’s, you know, got the Olympics in 10 years time. They’re bringing forward lots of infrastructure jobs, but the yields are getting so sharp for some properties there.

It’s almost like Sydney and Melbourne. Like I’m seeing some industrial in Brisbane sell. At low fours, four percent net yields, which is, for me, so sharp, like, it’s um, but that’s what investors are seeing, and they’re seeing it’s a capital growth asset more than anything now, and commercial property is a store of wealth, it’s not just there for cash flow, it’s um, you know, it’s just like a bitcoin, you think, you know, it might be worth longer than, you know, more money in ten years time, like commercial is a store of wealth, and the value of currency devalues.

Places like an inner city Brisbane industrial will forever hold its value. It’s just, it’s quality, and um, and it will be re let. So yields are going to get very sharp there. Yeah, and conscious also, and talking about maps and school atlases and stuff, um, it’s, Melbourne is closer to Brisbane than what Cairns is to Brisbane, right?

It’s a big place, you know, and, and, and sort of flippantly sort of talking about those different markets. You’re talking thousands of kilometers, right? Like it’s, it’s a, it’s a big old joint and they are genuine micro economies. Each of those, those regional areas that you’ve spoken about, they are. truly independent, connected in the great state of Queensland.

But, um, yeah, they all have their absolutely their own nuances. So, well, have a think about how far do you think Cairns and Townsville are on a map and just Google it, drive time. It will shock you because you think they’re next to each other, um, on a map, but there’s a, have a Google. Have you ever driven it?

No, no. Do you know what we should do? We should do a, we should do a road trip one day of, uh, Queensland, uh, regional areas. Commercial property, commercial property tour. Uh, check out all the good pubs, drink 4X, all that good stuff. Yeah, um, New South Wales, Sydney, uh, and, and the regional markets, regional markets.

I, I think you gotta, to your point, you gotta club in, um, Yeah, the dynamics are so similar these days, uh, Wollongong or, or the Illawarra and all that, also the central coast is sort of all, sort of metropolitan. Greater Sydney. Greater Sydney. And then you’ve got your big regional centres, go out west, you know, Katoomba, Bathurst, Orange, Mudgie, uh, go north.

I see, look, my opinion of Sydney is, I think it’s probably got more risk in the market than anywhere because it’s just so… It’s, it’s, it’s a very high price market. Like they, I saw, um, there was one in double bay. It was 353 or 56 square meters. It sold for nearly 21 million. Um, retail, it was just retail. I had, um, it was like on a main road and you could build four stories.

And I’m thinking 21 million. I can buy. An entire massive shopping center. You could buy all of Townsville. Yeah, you could literally buy a few high rises. Probably the marina while you’re at it. Yeah. So, there’s um, like that was, that was a, yeah. It’s a different market. Yeah. And for me I feel like that’s just.

Someone who’s just got unlimited money parking it up. Cash buyer. Yeah, has to be, because no bank would support that valuation. That’s generational cash buyer, isn’t it? You know, just park the money there and put a boutique there. And being double bay, there’s probably a… Double bay, double pay. Plenty of old money just trying to slash it.

You need to do it. Yeah. So, look, those, those super high priced markets, I think, um, they’re not the everyday punter playing in them, and they probably run their own rules, but um… Yeah, look, I, I just think that, that could drop to say 18 million very quick, but, um, the markets we’re talking about where yields still stack up, you’re buying at all the right fundamentals, there’s, there’s a lot more wealth potential in those markets for sure.

It’s good. Well, Scott, I look forward to getting together, uh, next, uh, month for Inside Commercial Property where we’ll kind of do a proper breakdown, um, of an asset that, um, that we’re currently considering. So, uh, we should know then what we choose to do with it at the moment, we’re sort of in the middle of, um, Uh, the negotiations with it.

So I look forward to that. That sounds really cool. Uh, check in and if you haven’t listened to the first couple of chats we had about this is, um, myself sharing, uh, a journey, um, buying a commercial property, uh, using the good people over at Rethink Investing. I’ve sort of chosen a price point, which is, you know, the median.

If it was a bell curve, the sort of stuff that most property investors who are looking at commercial property would be operating within. So I’ve chosen an asset, um, sort of price point around there just so we can get really into the details about how it all works. So stay with us. I hope you enjoy that when we get together.

Scott, thanks for your time today. Thanks, Bill. Anything to round out with, um, you guys, your phone’s running hot, no doubt, but you’re happy to take a call or do more meetings or all that sort of stuff? Yeah, look, always we’re quite up front with wait periods and all that and just remember we, there’s a wait period, not because, um, there’s not enough properties, but there’s not enough good quality ones.

So we, we, uh, rather push people’s wait period out than, uh, just take everyone on. So yeah, there’s only one market, we’re all playing in it. And um, yeah, it’s, uh, especially when it comes to commercial, it’s just good to, uh, to wait for the right property and yeah, different budgets have different wait periods as well.

So I don’t think that’s the other thing to get your head around. But. That’s what Scott’s talking about there is strategic patience. Um, embrace it works. Um, inside commercial property, uh, Phil Tarrant, uh, Scott O’Neill. Hope you enjoyed that. We’ll see you again next time. Until then, bye bye.