WA Commercial Property Focus

Like the local economy, the WA core commercial sub-$5m category market remains relatively strong.

In 2023, market observers expected WA core commercial yields to increase following the rises in the RBA interest rate. However, that did not materially eventuate, largely due to heightened demand from interstate investors who looked to WA for more favourable returns.

Another buoying factor was that any drop in investor demand was offset by owner-occupier appetite – particularly for industrial assets.

As a result, solid market confidence was seen across the year in both the Perth metropolitan area and key regional hubs, such as Kalgoorlie.

Kalgoorlie’s fortunes are intrinsically tied to the performance of gold. During the GFC, gold was trading at $960 an ounce. In December 2023, it was worth $3,000 an ounce. This has driven the resurgence of general business activity in Kalgoorlie, including by junior miners and larger resources corporations.

Industrial

Without question, industrial assets are currently the best-performing commercial asset category in WA. Local property agents report that there is strong interest in sub-$5m assets, which is being driven by the resources and ecommerce industries.

Across the Perth metropolitan area, there have been many transactions in both primary and secondary locations. While secondary locations have traditionally experienced soft demand and high vacancy rates, they are currently in high demand by owner occupiers who are keen to establish a property foothold in the market.

For example, an industrial property in Malaga, a suburb north of Perth CBD, sold for $1.725m in September 2023, which was a 57% uplift on its sale price in July 2022. While there had been some minor refurbishment, the uplift was predominantly market-driven. At a higher price point, an industrial property in Maddington, a suburb south east of Perth CBD, sold for $7m in May 2022 – up 45% on its December 2019 sale price with no improvements made to the property in that time.

Unsurprisingly, the current limited supply of industrial property has resulted in an uplift in rents and values. Reflecting this, incentives have dwindled – and in many cases been dropped.

Regional WA is also enjoying a strong industrial market. For example, a sub-$5m office warehouse in Kalgoorlie that Opteon valued (for purchase) in March 2022 and later in September 2023, increased in value by 40% over those 18 months. The yield for that property in 2022 was 10.75% and 8.5% in 2023. The only significant difference at the time of the valuations was that the weighted average lease expiry (WALE) was six months longer in 2023. The evident yield compression in Kalgoorlie has been reinforced based on discussions with local agents.

Office

There’s no doubt the commercial office market in Perth has steadied since the pandemic. There’s been renewed confidence in the market because of the strength of the WA economy.

A recent Property Council of Australia media release stated that “Premium refurbishments and innovative new office spaces are revitalising the Perth office market, driving a surge in demand”. It went on to say that the “West Perth office market has recorded its fifth period of improvement, where office vacancy rates have declined by 2.1%, bringing the current vacancy rate to 11.1%”.

Generally, rents and values have remained stable but activity levels have picked up. This reflects both the surge in office property supply before the pandemic, and the current tightening of the supply pipeline. The current trend may continue to see vacancy rates drop and rents start to grow. And while over-leveraged investors may be forced into distressed sales in 2024, the strong resources sector is likely to help offset any market-wide impact.

An ABC article, which was published in January 2023, highlighted there is also a strong pipeline of commercial projects in Kalgoorlie, noting that “Council data [showed] there was an increase in planning applications for commercial properties from 61 to 127”.

Retail

As with WA office assets, retail assets remained relatively steady in 2023. Compared to the rest of Australia, Deloitte forecasts WA will enjoy the strongest growth in retail sales over the coming years. However, few retailers have been immune to the impact on discretionary spend caused by the cost of living pressures on consumers.

In this space, a risk to watch is the growing market dominance of online retailers. While they are putting pressure on bricks and mortar retailers, the shift in market share hasn’t yet affected values for assets in primary locations. However, the pinch is being felt in secondary locations that are less attractive to investors.

In pockets of regional WA, demand for retail assets is strengthening. For example, in response to Kalgoorlie’s shortage for temporary worker accommodation, the City of Kalgoorlie-Boulder has announced its proposal to tender a key workers lifestyle village, which will have 393 dwellings. It is also considering a second proposal to have another temporary worker accommodation facility built in the city. When these facilities are operational, it’s reasonable to expect demand for retail space will follow.