_What types of commercial property are Australia’s ultra-wealthy investing in?

The real estate consultancy’s The Wealth Report 2022 found the appetite for commercial property was growing, with 23 per cent of the world’s ultra-high-net-worth-individuals (UHNWIs) looking to invest directly in commercial property in 2022.

In Australia, the research found that on average, 37 per cent of Australian UHNWIs investable wealth is allocated directly to commercial property, with 35 per cent planning on further investment in 2022.

Meanwhile, on average, 20 per cent of Australian UHNWIs investable wealth is allocated indirectly to commercial property, with 26 per cent further planning to indirectly invest in commercial property in 2022.

What commercial real estate sectors are investors focused on?

Within the commercial market, the top investment sectors for Australian UHNWIs are currently industrial (64 per cent), office (56 per cent), retail (53 per cent), logistics (51 per cent) and development land (45 per cent).

According to data from Knight Frank’s The Wealth Report 2022, the sectors becoming of more interest include industrial (65 per cent), logistics (58 per cent), agricultural (56 per cent), healthcare (51 per cent) and data centres (42 per cent).

In the industrial sector the accelerated growth in e-commerce, alongside the evolving situation regarding supply-chain disruption and onshoring of manufacturing was generating new demand for warehouse and distribution space, which in turn was driving up occupancy rates and investor confidence in the sector, said Knight Frank’s Partner, Research and Consulting Jennelle Wilson.

She said the strength in the occupier market, with low vacancy, strong take-up, demand for future supply and an outlook for rental and land value growth was attracting investors, who were stepping up their exposure through development and acquisition activity.

“The ongoing focus on supply chain resilience will continue to drive industrial demand,” she said. Demand for last-mile sites and facilities, as well as multi-level, will get increasingly competitive.

“We expect growth in values due to the strong occupier demand.

“The outlook for rental growth in the industrial sector is much stronger than for retail and offices, with all major locations currently experiencing a strong uplift.”

In the agriculture sector, investors are being attracted by an environment conducive to growth, with prices, interest rates and generally seasons favourable in the broadacre market, said Knight Frank’s Head of Rockhampton Pat O’Driscoll.

“This is a market we have not seen since possibly the late 1950s,” he said.

“It’s been driven by the worldwide demand for protein, and with global population growth expected to continue through to 2050, there is no sign of the demand abating.”

Mr O’Driscoll said the broadacre market had been a challenging area for investors historically, with a lower annual yield and a long-term view required.

“However, the current market is creating more interest from this sector as the prospect of capital gain has improved and is an attraction.

“Further interest from investors will increase if a passive secondary income is available on property to strengthen the yields.”

Knight Frank’s Chief Economist Ben Burston said overall there continued to be strong demand from private investors for property offering securely let, long-dated income streams across all asset classes, including some emerging asset classes.

“The pandemic has seen private investors focus more on specialist sectors aligned to essential services, and less on the traditional mainstays of office and retail,” he said.

Where are the opportunities moving forward?

Some of the sectors providing new opportunities for private investors moving forward include renewables infrastructure, childcare centres and pubs.

In the renewables space, state and federal governments are supporting investment in green hydrogen production, said Mr Burston.

“This has the potential to make a substantial contribution to the clean energy transition while underpinning a new export industry,” he said.

“Australia has some of the world’s best renewable energy resources and significant land availability with access to water resources.”

Mr Burston said Geoscience Australia has identified 262,000sq km of coastal land suitable for hydrogen production; enough to produce more than the global demand predicted by the Hydrogen Council for 2050.

“The NSW government is betting on new investments in green hydrogen to boost rural economies and help the state achieve its current goal of net zero emissions by 2050,” he added.

“The state’s newly-unveiled hydrogen strategy provides up to $3 billion in incentives, including tax exemptions for green hydrogen production, plus a new hydrogen refuelling station network to support hydrogen hubs in the Illawarra and the Hunter regions.”

Mr Burston said childcare centres were an increasingly popular asset class for private investors, offering opportunities moving forward.

“Increasing government support for the sector, including through federal funding to make childcare more affordable to boost female workforce participation, has increased the attractiveness of the asset class,” he explained.

Pubs are another sector attracting very strong interest from UNHWIs.

“Investors are acutely aware that these assets provide strong lease covenants and reliable income streams,” he said.

“Those located in attractive lifestyle destinations are underpinned by high land values with substantial upside potential given the outlook for strong growth in domestic tourism as we continue to recover from the pandemic.

“The market is also highly fragmented with limited institutional involvement so is more accessible for private capital than other sectors.”

Mr Burston said healthcare assets, self-storage facilities, data centres and hotels were other sectors offering opportunities to investors over the coming year.