When choosing to invest, or reinvest, in commercial property, it is always prudent to examine the market place and gain an understanding of what cycle the market is in.
A property cycle consists of a series of factors that repeat themselves over time which may affect the market. These can be anything from demand, supply, monetary values, vacancy rates, to national and international economic factors. Making yourself aware of these cycles, can aid you in determining when to buy, sell, reinvest, or simply sit tight.
While cycles may vary in duration and in the factors driving them, they generally follow the same path.
The beginning period is when property values gradually start to increase, then gather speed as more investors enter the market and push prices higher. Eventually, the market reaches its peak, where values are pushed to their limit. After this cycle comes the correction, which is when values become more passive. It is worth noting that a decline in prices may become steep if many buyers decide to sell at once.
Where possible, remaining for the long haul is generally more advisable. As we know, the cycle will repeat itself.
However, the key message for investors is to understand at which point they’re entering the market, and how this knowledge can best assist them in their decisions.
It is important to also acknowledge that different markets move at different speeds and only careful analysis of the evidence will form a clearer picture of where things sit within the market that you are interested in investing in.
Regardless of the type or location of your property, you will need to be aware of the factors that will determine demand and supply. As demand goes up relative to supply, so do prices.
Demand for commercial property is largely determined by economic conditions such as the economy’s overall health, interest rates, unemployment rates, as well as consumer and business confidence.
Investors need to consider the economy by sectors. As the economy strengthens, transport companies generally are the first to experience growth, driven by demand for manufacturing materials and the increase in imports. This then leads to demand for industrial property such as warehouses, followed by retail space. As transport stocks rise due to increased business earnings, more jobs become available and demand for office space improves – and the cycle continues.
The cost and availability of money also play a major role in determining demand across all property types. It affects how many investors can afford to enter the market.
Low interest rates and comfortable credit access tend to push prices up – a trend we have been seeing recently. Yield also has to be balanced against the appeal of other investments, such as stocks and bonds.
As long as investing in commercial real estate compares favourably with the other options, demand should remain strong.
The price of commercial property is largely driven by the rental income it will generate, which is in turn driven by tenant demand and the confidence of the lease contract. Commercial property yields still offer a strong premium relative to bonds, suggesting we are a long way from a major cyclical downturn.
Need advice? Talk to the experts at HKC Property Consultants. We’re happy to prepare a strategy for your next lease or help you find new premises to invest in. Call now 03 9078 4794.