From the Financial Review: Five ways to profit from property in 2023

While a rising interest rate environment is the prevailing conversation topic of the moment, it is only one of the challenges expected in the property space for 2023. But for opportunistic investors 2023 may actually be a very good year. Read on:

The AFR recently wrote an article outlining "five key property market predictions for the new year." For those with available capital 2023 may be a year of opportunity:

The following are the AFR predictions:

Development Sites

Many investors who bought development sites for apartment or mixed-use projects in the past few years are heavily leveraged. The combination of rising interest rates, surging construction prices and economic uncertainty has cast a shadow over these projects and many are no longer financially viable. Unless these developers have a clear plan to have the project built and pre-sold or sold, they won’t be able to sit on these sites as interest rates rise. Some smaller and mid-tier developers may be forced to start selling out next year.

Yields

In listed property, real estate investment trusts are down 22% in the year to November 23, and analysts are forecasting an average 10% fall in direct prices of office, retail and industrial property. These falls haven’t played out in direct property markets, in part because there haven’t been enough transactions to provide a comparison with previous sales. In this market, only those investors who have to transact will do so, so there are likely to be lower transaction volumes over the next 12 months. Owners who are forced to sell will receive lower prices, which will in turn push yields higher, presenting another opportunity for investors to buy assets at discounted prices.

The opportunity here is for well-capitalised investors who can hold for the medium- or long-term and can execute a plan to improve yield or growth value.

Housing Shortage

With many residential property developers sitting out of the market and foreign students and migrants returning to Australia, the housing shortage is likely to intensify. Further, several large house and apartment builders have collapsed under the weight of rising costs and higher interest rates. Vacancy rates on entry-level rental properties in Sydney, Melbourne and Brisbane are already sitting at 1%, well below the peaks of COVID-19.

Given this, it is likely that residential rents will continue to rise. The opportunity for investors exists for those who can place strong deposits at purchase.

Falling Value of B & C-grade offices

Many employers are upgrading to premium CBD office accommodation to bring workers back to the office, with a drop in rents in recent years making this much more affordable. This has left a glut of vacant B- and C-grade office accommodation in the city fringes and suburbs. With less demand for office space, many employees who would previously have leased these offices are instead using co-working office arrangements. At the same time as rents for these properties have plunged, values for industrial property have increased sharply. We are approaching a tipping point where some of these old office properties could be bulldozed and replaced with high-density last-mile logistics to service the growing online retail sector.

Riches in Niches

Falling yields and rising prices in recent years have pushed mum-and-dad and wealthy individual investors out of traditional commercial property classes such as office and industrial, and so they’re turning to assets such as medical offices, childcare centres and pubs. These assets are much more affordable for individual investors. A big-ticket industrial building leased by Amazon for instance, might trade for tens or hundreds of millions of dollars, whereas a childcare centre might be $3 million to $4 million.

Keep in mind, the higher returns potentially provided by these properties often come as a result of increased risk associated with them. Opportunities also exist where leases can be improved upon.

As always, this article is not intended as professional advise or financial advise. Always seek independent advise from a trusted source before investing.

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