Timing and Funding – an alluring window?

The adage in property that has long been claimed as the key to investing of "Position, Position, Position", should really be "Timing, Timing, Timing". 

Savills' Peter Tyson, Divisional Director - Retail Sales QLD and 

Helen Swanson, Associate Director - Research QLD take a detailed look at the compelling case for action in today's market. 

With interest rates on their way down, and yields holding up, some real analysis shows the allure of a well located commercial or retail property could be on the rise, quickly.  Today we show you what looks to be a simple yet appealing window of opportunity.

The cash rate, at 3.5%, is the lowest it has been in two years.   It is now only 50 basis points above the lowest rate in more than 20 years.  In addition, most market economists are also predicting further cuts to the cash rate this year.

Furthermore, the ten year bond rate was sitting at 5.16% mid last year but as at early June is now at 2.77% the lowest rate Australia has seen and clearly points to some continuation of historically low interest rates.

Broadly, debt funding is now relatively cheap ranging from 5.5%-6% for a variable facility, with Loan to Value Ratios (LVR) having improved over the past 2-3 years - now up to 65% or 70% on commercial or retail investments.

In addition, yields on most forms of commercial or retail property have softened (risen) in the post GFC market, and are now largely viewed as having stabilised. Yields can range from circa 7.5% per annum for prime property, to 10% plus in some sub-sectors.

Finally, positive gearing is also back - a much better fundamental than negative gearing. Surplus cash-flow can pay down debt, or provide an annuity for the investor making opportunities very appealing.

In comparison returns from other investment categories are not as attractive.  Comparable returns on traditional investment options are:

• Fixed Interest - Term Deposit Rates currently range around 5% per annum with no tax benefits or opportunity to leverage

• Bonds - Australia's Government Bond Yield for 10 Year Notes has reached a record low of 2.77% in June of 2012

• Equities/Share Market - The sentiment driven bourse has proven very volatile since the dizzy peaks of 2007 and dropped 10% in the past month.

Even supposed blue-chip shares struggle to maintain value, much less show real capital growth, with returns also unpredictable and PE Ratios ranging widely.

A simple case study can help understand the potential returns that can be made from retail, commercial, or industrial property right now.

Let's look at an investment in a mid-range neighbourhood shopping centre, the ones we all know and shop in. A Woolworths Supermarket and 8 specialty shops at say 8.25% yield in the first year. If we invest 40% of the value in equity and gear the purchase at 60% LVR and assume an interest rate of say 6%, the surplus income delivers a return on equity of around 11.8% per annum before tax and depreciation. The returns from shares and fixed interest don't come anywhere near the potential return outlined above.

The combination of today's low cost of debt, relatively high returns and clear positive gearing landscape, have commercial, industrial and retail property investment standing out as a star investment choice at this point in time.

In fact, with yields on prime office from 7%-8.25% and secondary office from 8.5% to 9.75%; prime industrial from 7.75%-8.75% and secondary industrial from 8.5% to 9.75% property is looking increasingly attractive.