The Australian economy presents an improving outlook generally although it remains difficult to predict at the micro level given ongoing uncertainty created by inflation pressures and the widespread negative sentiment and concurrent mortgage stress in the housing sector generated by ten RBA rate increases in the economy.
Media reports now commonly refer to interest rate rises, business and personal financial insecurity; funding and finance issues, housing prices, jobs security, wage stagnation and employment prospects as the main causes of concern in the economy.
When the low interest rate environment disappeared it took strong demand for all kinds of real estate with it. Capitalisation rates (cap rates) for all property types sharpened markedly as the economy powered along on the back of those minimal interest rates, with purchasers and investors chasing income and capital growth across the board.
Uncertainty increased and demand softened markedly once the RBA started its rate hikes. Consequent changes to the commercial and government bond and finance markets and flow-on effects to funding and affordability have affected value and pricing decisions since in the traditional property markets.
Properties with modern improvements, long-term leases, quality tenants and mature cashflows have continued to see demand given structured rental growth available from good tenants and the pick-up in land values. Secondary assets however will remain much less attractive through 2023 given the greater risks involved.
Well-managed self storage remains a resilient asset class and mature facilities with strong cashflows are much less likely to suffer the direct value impacts seen in the wider property market. Occupancy and rental rates rebounded strongly post-COVID and remain noticeably stronger since.
Values may potentially soften if major funding issues emerge locally or abroad or an abrupt geopolitical event occurs, but informed institutions, investors and owner operators continue to dominate demand for assets in this sector. This is despite general sentiment in the traditional property markets being in a wait and see mode.
Freehold going concern, turnkey or development sales have mainly occurred off-market for some time. Analysis of the most recent publically visible sales show that cap rates generally remain dependent upon individual property factors and catchments, with market-based cap rates for mature facilities occupying a circa 5-6% range, excluding outliers or portfolios.
The industry has by no means peaked and opportunities exist throughout suburban, provincial and country Australasia – as indeed they always have.
