One of Australia’s biggest challenger banks expects demand for commercial real estate to gather momentum as residential investors face tighter lending conditions.
The rental yield on commercial property is over double that of residential property, at around 6.0 per cent compared to yields of 2.9 per cent on residential housing and 5.7 per cent for Australian shares, based on insights from AMP Capital’s chief economist, Shane Oliver.
ING Direct national partnership manager, commercial, John Kolyvas told Mortgage Business that with those numbers, it is not surprising that $28.1 billion was spent on Australian commercial real estate last year.
“More money is set to pour into the sector in the next year as interest continues to grow and tighter lending conditions are placed on residential investor lending,” Mr Kolyvas said.
“There’s little doubt that better value can be found in commercial property right now, provided investors know what to look for.
“Record-low interest rates have catapulted house prices, particularly in Sydney and Melbourne, but the same boom hasn’t happened in the commercial sector. There’s still some good buying to be had.”
Mr Kolyvas said that low interest rates, rising house prices and tighter residential investment lending conditions have been a boon for commercial mortgage brokers, with more and more investors bypassing the banks.
“In August, mortgage aggregator AFG reported a bumper profit for the year to 30 June 2015, attributed largely to the surge in commercial mortgage settlements which were up 23 per cent on the previous period,” he said.
“AFG singled out commercial mortgage broking as a key plank in its growth strategy.”
Mr Kolyvas noted that Yellow Brick Road-owned aggregator Vow Financial also reported a 62 per cent increase in new commercial business.
“Gone are the days when commercial bankers outnumbered commercial mortgage brokers,” he said.
“Traditional mortgage brokers are increasingly expanding into commercial mortgage broking while scores of bankers are leaving the institutions, followed by their clients.”
Unlike residential lending, where price and service is relatively consistent, there’s often considerable variation between commercial lenders in both product and policy, Mr Kolyvas said.
The price variation in residential lending can range between 0.30 to 0.40 per cent but in commercial lending it can be as high as 1-2 per cent, he said.