Investors buying commercial property on record-low yields are risking investment "suicide", warns Shane Quinn, CEO of Melbourne-based Quintessential Equity. Quinn’s voice has joined a growing cacophony of experts who’re worried that a bubble is building in this sector.
He recently told The Australian Financial Review that he had “grave concerns for assets purchased on very tight yields from investors looking for cash flow.”
Cash flow is the first thing you can lose in property, according to Quinn.
“Investors are under a lot of pressure to retain rental levels and cash flow streams,” he said. “We’re near the top of the cycle. Our thinking was that we would never see the low yields achieved in 2007 [prior to the global financial crisis] and that it was a once-in-generation thing. But they’re now probably 20 per cent stronger and at all-time lows in Australia.”
Quinn said this is a dangerous position for small investors to find themselves in. “I scratch my head at some of the prices being paid for assets that require a lot of capital expenditure and are on short WALEs [weighted average lease expiry]. They are not pricing in the risk. It’s suicide in my eyes. I can’t be any more [blunt] than that," he said.
Concerns about a potential bubble building in the commercial sector have been growing as yields have tumbled on highly sought after assets, like childcare centres, supermarkets, take-away restaurants, and petrol stations.
In May, a new record low 3.6% yield was hit for a $4.3m G8 childcare centre in Vaucluse, situated in Sydney's eastern suburbs. This was sold at auction alongside a Red Rooster in Brisbane (which sold for $3.35m on a 4% yield), and a retail and office building on Carlisle Street in St Kilda (which sold for $1.6m on a 4.2% yield).
Many investors are leveraging their self-managed super funds (SMSFs) as they compete for assets that generate better yields than bank deposits. Figures from the Australian Taxation Office show that since December, property investments held in DIY funds have exceeded cash for the first time at $162bn.
New SMSF Rules From 1st July 2017.
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