Latest / The Follio Property Podcast / Australia’s Commercial Property Deals Jumped 30% While Housing Slumps | Here's Why

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Australia’s Commercial Property Deals Jumped 30% While Housing Slumps | Here's Why · The Follio Property Podcast

• 0:00
  House prices have dropped for a sixth straight month.
• 0:04
  What's happened with Resi is not good for us.
• 0:06
  We've seen about 80% drops in volume.
• 0:09
  It's definitely tougher out there because I guess the old equations don't work anymore.
• 0:13
  So if you're not going to get growth over the next year or two, why would you buy it?
• 0:17
  How's the market looking post budget with a lot of the changes that have come through?
• 0:20
  Sort of everything the government did.
• 0:22
  It's been a bit of a blunt hammer over the entire Australian resi market.
• 0:26
  There's areas where you're seeing 30% vacancy rates, one in three buildings empty.
• 0:31
  Scary thought.
• 0:32
  It's actually once in a generation shift from resi to commercial, and that's because yield is just more important than ever.
• 0:38
  If you keep going down the housing route, it's going to get so negatively geared, you simply won't retire.
• 0:43
  Commercial's been untouched.
• 0:44
  We're doing still 100 million every single month.
• 0:49
  You're listening to the Folio Property Podcast.
• 0:52
  I'm Rhys Bettle and I'm here each week with my co-host, Lachlan De La Hunte.
• 0:56
  Lachlan, we've been talking post-budget for a couple of months now and we've been talking about a lot of losers post-budget.
• 1:04
  I thought let's get someone in who knows about who's probably some winners off the back of the budget.
• 1:07
  So Scott O'Neill, welcome to the Folio Property Podcast.
• 1:11
  Good to be here, boys.
• 1:12
  Thanks, haven't we?
• 1:13
  Mate, I think we'd love to get you in just to see what the sentiment's like in the market as well.
• 1:17
  So for those that have been living under rock, most of our audience are pretty well-developed property investors themselves.
• 1:23
  I'm sure they probably know who you are, but you definitely play in the commercial space, right?
• 1:26
  So we'd love to get your opinion on how's the market looking post-budget with a lot of the changes that have come through.
• 1:33
  Yeah, look, it's crazy what's happening.
• 1:36
  So full disclosure, I have a residential buyers agency, a commercial buyers agency, and eight other businesses in the property and finance game.
• 1:43
  What's happening with Resi is not good for us.
• 1:45
  We've seen about 80% drops in volume, revenue, whatever you want to call it.
• 1:50
  It's definitely tougher out there because I guess the old equations don't work anymore because you've got to account for more tax.
• 1:57
  It's not even just about that.
• 1:58
  It's also the negative sentiment, which is...
• 2:01
  really weighing down on the future capital growth prospects so if you're not going to get growth over the next year or two why would you buy and that's the thinking i i believe you always should look out for a good deal of course and this these times are when you get the best deals but that's not how the the majority think unfortunately so um yeah it's quite a but commercial is quite different it's actually
• 2:23
  I'm calling it a once in a generation shift towards commercial from resi to commercial.
• 2:28
  And that's because yield is just more important than ever.
• 2:31
  Like think about even the capital gains, increasing capital gains tax.
• 2:35
  Resi is there for capital gains.
• 2:38
  So is commercial, by the way.
• 2:39
  And like the long-term growth rates for commercial and resi are very similar.
• 2:42
  So that's one of these old myths that has long since been debunked.
• 2:45
  But...
• 2:46
  If you are buying a high-yielding asset, you're less inclined to sell.
• 2:50
  So all the commercial properties I've ever purchased, I plan to hold forever.
• 2:53
  Refinance maybe if I need to.
• 2:55
  But capital gains doesn't even come into the equation because you're buying it for that holding yield because that replaces your income.
• 3:02
  The yield is going to be higher than the interest rate cover.
• 3:04
  So it's positively geared.
• 3:07
  And that means no negatively geared benefits.
• 3:10
  So sort of everything the government did didn't really affect the commercial space.
• 3:13
  So it's been a bit of a...
• 3:16
  blunt hammer over the entire Australian resi market.
• 3:20
  But commercial has been untouched and we're seeing, seeing volume happening.
• 3:23
  Like we're doing still a hundred million of commercial every single month.
• 3:28
  And that's, that's that's makes us very busy in the, in this space.
• 3:32
  Yeah.
• 3:33
  What about personas?
• 3:34
  With everything that's happened with the budget, I'm sure, does the persona of, say, a recent client from the commercial side look the same pre-budget as does post-budget?
• 3:45
  Or are you starting to get a bit of an influx of mom and dad investors trying their hand and maybe not even ready for it as well?
• 3:52
  So the two biggest changes is, one, you hit the nail on the head.
• 3:56
  Yes, there's a lot more first-time resi investors.
• 3:58
  So they're just for the first time considering commercial because their resi portfolio doesn't stack up like it used to.
• 4:05
  They're hard to get into the right deals because they're generally lower budget on average.
• 4:11
  So a lot of these people won't transact in the commercial space, but a lot will.
• 4:14
  And the other big change is because we've got a New Zealand commercial business and the amount of demand over there is...
• 4:22
  Crazy.
• 4:23
  It's a fifth of the population, but it's almost doing the same profit as our entire Australian business now with a lot less staff.
• 4:30
  So that business is really benefiting from the rule changes of Australia's government because they're just taking their money elsewhere.
• 4:37
  These are Australians buying a New Zealand commercial property because they've got no capital gains tax and no stamp duty.
• 4:43
  So that really makes things quite lucrative over there.
• 4:46
  But what happens when you have to bring that cash back onshore?
• 4:49
  This is where you need a good accountant that works both sides of the fence.
• 4:53
  And yeah, look, you'll have to pay Australian tax, but no stamp duty.
• 4:59
  That's 5% saving straight up on the price.
• 5:02
  And it's also a currency play and also the dollar's cheaper.
• 5:06
  So you actually get more bang for buck.
• 5:09
  Like we're buying things like Woolworths for 8 mil and that'd be 30, 20, 20 mil in Australian dollars.
• 5:15
  That's 8 mil New Zealand as well.
• 5:17
  So...
• 5:18
  Yeah, things are cheaper for sure.
• 5:20
  And that's because it's gone through quite a significant restructuring, correction.
• 5:24
  Obviously, they brought in the same changes as the Australian government did recently.
• 5:28
  They did it four or five years before we did.
• 5:31
  And that economy has since gone backwards.
• 5:33
  So is that why you're seeing such good value there?
• 5:35
  Yeah, I actually did a social media post on like the impact of rents and why I predict Labor will probably lose the next election because this is what happened exactly to a T in New Zealand.
• 5:47
  They introduced these changes and rents went up about 35% over the next three years.
• 5:53
  and then they repealed it and rents went back four percent the year after that so uh all these tinkering around where they try to i guess deal with the the demand side not the supply side are you talking resi now talking resi yeah yeah so yeah but that has a big impact on the masses and um yeah their popularity definitely dropped because of that among other things but um yeah we'll see what happens in australia but
• 6:17
  Yeah, commercial is quite strong over there.
• 6:19
  It's a market that did drop.
• 6:20
  It peaked in 2021.
• 6:22
  And we're buying it like 20%, 30% below peak value still.
• 6:25
  So even if it goes back to world.
• 6:27
  In the commercial space?
• 6:28
  Yeah, commercial.
• 6:29
  Yep.
• 6:29
  And with that, though, does that give you some level of concern if what New Zealand went through is arguably what Australia could go through?
• 6:36
  Would that see the commercial market here correcting by 30% or we don't?
• 6:39
  They, if you look at their history, they expanded in price a lot faster.
• 6:43
  Their interest rates were a lot more aggressively up and down.
• 6:47
  So they moved faster both ways.
• 6:49
  So everything was a little bit more volatile over there.
• 6:52
  So I don't think the same thing will happen.
• 6:55
  There's like every asset class is different.
• 6:59
  The best one right now is like large format retail.
• 7:01
  That's like your pet barns, bunnings, all that type of stuff.
• 7:05
  They're not building enough of this stuff.
• 7:07
  Those businesses are still going well.
• 7:08
  A lot of online sales, still the foot traffic's there.
• 7:11
  Profit margins are there as per the ASX reports.
• 7:14
  So...
• 7:15
  The tenants are just taking up spaces and as a result, investors are putting more money into that space.
• 7:20
  So we're seeing a lot of growth in that.
• 7:23
  You go to the flip side, which is the worst market in Australia, the secondary office.
• 7:28
  That's like your 30-year-old tower in the CBD.
• 7:31
  They're gone.
• 7:31
  No one's going to rent them.
• 7:32
  But even if you drop the rent 50%, you still can't get tenants in many of those cases.
• 7:38
  And...
• 7:39
  There's areas where you're seeing 30% vacancy rates, which like one in three buildings, empty.
• 7:44
  That's a pretty bad scenario.
• 7:47
  And then everything else is in between, like industrial strong, retail's doing really well at the moment as well.
• 7:53
  The reason for that is it suffered a lot during the COVID pandemic.
• 7:58
  People pulled their money out.
• 8:01
  Prices were lower for a few years, and now it's just catching up.
• 8:05
  Interesting.
• 8:06
  One thing Rhys touched on, which you sort of addressed, is the influx of probably more mum and dad investors, less sophisticated investors.
• 8:13
  Because you're right, everyone needs to chase your yield now.
• 8:15
  The whole negative gear was a fantastic benefit for so long.
• 8:20
  The government's obviously now disincentivized that.
• 8:22
  Commercial isn't like going to buy a residential house, right?
• 8:25
  There's a lot more to unpack and it's really around the strength of the tenant.
• 8:30
  My concern that we've sort of discussed on the podcast previously is
• 8:33
  Where do those mum and dads go that have a budget of one to one and a half mil?
• 8:37
  Because your tenant profile is very much high risk in that scenario.
• 8:41
  Watch it.
• 8:42
  Yeah, and look, it's a big problem for our business because we literally have over 100 inquiries a week for the business.
• 8:48
  So 80% of those are in that price point, obviously.
• 8:51
  And then you've got the high net worths that can do whatever they want.
• 8:55
  So there's not enough properties in Australia worth buying at that price point.
• 8:59
  You can look at that as two things.
• 9:01
  It's either good if you're already in the market because there's demand pushing prices up, or it's bad because you're going to pay premium to get in.
• 9:09
  especially if interest rates are sort of going up or higher than they used to be.
• 9:12
  So you've got to be a bit careful in that space.
• 9:14
  I like to say if you have the ability, if you're a wholesale investor, get into a syndicate where you're buying a tenth of a, I don't know, a Coles multi-tenant shopping center or a big industrial complex, things like that are much safer.
• 9:28
  They're managed by professional fund managers.
• 9:31
  You've probably got exposure to this stuff in your super already, like the likes of Stockland and you know, all these, there's heaps of big fund companies out there and,
• 9:39
  I've created Wreath in Capital, which is basically investing in funds, commercial properties, industrial, retail, just long lease stuff with good upside.
• 9:49
  And it's super popular because it's safer.
• 9:51
  You can put like a hundred grand into it.
• 9:54
  But to be a wholesale investor, look up the definition of that.
• 9:58
  There's a lot of people don't meet that criteria, unfortunately.
• 10:01
  $250,000 income, net assets over $2.5 million.
• 10:05
  Or just invest $500,000.
• 10:07
  And that's a way.
• 10:08
  So a $1.5 million purchase would need about a half a million dollar deposit because 30%, that's $500,000 plus stamp duty.
• 10:15
  All of a sudden you need about $600,000, $650,000 just to get the deal done.
• 10:19
  So maybe instead of doing that, go into a fund,
• 10:22
  then you're not dealing with one tenant the size of a 250 square meter shed.
• 10:27
  That makes a lot of sense because that's my biggest concern at the moment is people going out there and we're in winter at the moment in terms of the economy, in terms of where the markets are at and where they're potentially going.
• 10:39
  And there's a high probability that things could get worse.
• 10:42
  And if you've got a – you think of the tenant profile under $2 million, you're thinking about hairdressers, you're talking about office, you're talking coffee shop tenants, and they're the ones that can't weather a significant financial event.
• 10:54
  Yeah, it's so right.
• 10:56
  Rethink Investing dominates in that kind of 3 to 10 mil price point.
• 11:00
  That's where you get the best of both worlds.
• 11:02
  Freehold, maybe multi-tenant, maybe national tenant, long lease, like capital city, you sort of get everything in those deals.
• 11:10
  And what sort of cap rates yields the listeners like?
• 11:13
  We average about, we don't like going under 6% net yield, mostly because we are finding enough deals out there above that.
• 11:20
  If you're going sub-6, there's got to be a reason for it.
• 11:23
  Either a lot of security, maybe there's an upside.
• 11:26
  Development upside.
• 11:27
  Stuff like that.
• 11:28
  Because there's no point, this is like, there's a lot of people in my industry that just want to sell business.
• 11:32
  buy sharper yielding deals.
• 11:34
  And the reason is because then they could get you more properties.
• 11:37
  There's a lot of deals out there for four, four and a half percent net yields that look okay.
• 11:41
  But then what's the point of coming into commercial in the first place?
• 11:43
  You may as well just buy a regional house at a 6% gross yield and you'll have 2% cost there.
• 11:49
  So that's 4% net on a house.
• 11:51
  You've got to have a good enough yield, I think.
• 11:53
  And then you're gonna get cashflow, you get growth.
• 11:57
  The high-yielding deals tend to do better in higher interest rate environments too simply because there's more demand on the resale.
• 12:04
  If you've got a 7% asset, you sell that pretty easily today.
• 12:08
  If you're banked on a 4% sellout, no one's going to touch it at the moment.
• 12:11
  And that's the concern, right?
• 12:12
  The cost of money at the moment in the six is well and truly and likely to go potentially higher than that.
• 12:19
  The old rule of thumb with commercial is you're typically chasing 1.5% to 2% above the cost of money.
• 12:24
  Is that fair to say?
• 12:25
  Yeah.
• 12:26
  Yeah, look, that's probably on the fund space because you can still leverage and then you're putting a cash deposit in.
• 12:33
  So you don't need to get the full cover.
• 12:35
  If you're refinancing and doing 100% debt, so let's say you've got your family home and there's a million bucks equity.
• 12:42
  This happens a lot, by the way.
• 12:43
  So the client will go to a mortgage broker.
• 12:46
  The mortgage will then say your house is worth a million bucks more.
• 12:49
  Let's pull that money out.
• 12:50
  Use that as a deposit for a commercial property.
• 12:53
  And then effectively, it's 100% debt plus costs on the new property.
• 12:58
  So in that case, you don't want to be negatively geared.
• 13:01
  You do want a bit of a top up on top.
• 13:03
  And it might be 1% above.
• 13:05
  Some people, like we did this one with a farmer last year.
• 13:09
  He was lucky enough to own a very large estate, you know, 100 mil plus refinanced, pulled out, what was it?
• 13:16
  It was about...
• 13:17
  It was about $10 million as a deposit.
• 13:20
  And he used $10 million to then buy a $30 million shopping center.
• 13:23
  That shopping center had a 9.5% cap rate on it.
• 13:26
  So the interest rate was six, just under six.
• 13:31
  So there's a 3% margin.
• 13:32
  Yeah, it's a good buffer.
• 13:33
  He's a million dollars passive income straight up.
• 13:36
  Yep.
• 13:36
  And that's where it makes a lot of sense.
• 13:39
  What are the hesitation, I suppose, and we're getting comments in our channel about obviously bonds where they're at.
• 13:45
  So commercial property, that's to call it a 6% yield.
• 13:50
  There is still risk with commercial property.
• 13:51
  There's risk with residential property.
• 13:53
  There's risk with investing across the board.
• 13:55
  Bonds are arguably risk-fairy and they're talking about five, 10-year bonds at 5%.
• 14:00
  How do you speak to that in terms of-
• 14:02
  Well, number one, you can't leverage bonds.
• 14:05
  Number two, there's a lot of rental growth happening at the moment.
• 14:08
  So retail, industrial, they're doing very well.
• 14:11
  Even prime office is very strong at the moment.
• 14:13
  The vacancy rates for prime office are a fraction of what secondary is.
• 14:18
  So there's a rental growth story.
• 14:19
  And every time the rents grow, there's upside in the commercial property itself.
• 14:25
  But there's one other factor that a lot of people are missing is the fact that the commercial market is about 11th of the size of the residential market.
• 14:32
  Even if like 10% of the resi market starts looking at commercial, that effectively doubles the demand of the entire market.
• 14:39
  So we're seeing transaction volumes increase 30% year on year for commercial across the entire country.
• 14:47
  So it went from like 55 bill to like 80 odd bill.
• 14:51
  So money's flowing into this space.
• 14:53
  So that will create a tighter cap rate compared to historic averages.
• 14:57
  So I think due to the extra focus on it, because it's a bit of an unknown space, which is now becoming known to the masses, I think you'll just see extra people looking at it, which might create a new norm for a sharper cap rate where that 1.5% rule doesn't exist.
• 15:13
  and to the doomsdayers which there's plenty at the moment everywhere you want to look people want to and they're going to blow up the comments of that because it feeds into what they want to hear at the moment that there's you know you would have read and heard and i'm sure quite across the 18 and a half year cycle which is correlating anywhere from now to middle of next year there's going to be significant correction
• 15:33
  Take me back to when you started investing.
• 15:35
  I'm not trying to set you up with a question, but talk us through what happened to commercial property in 2008.
• 15:39
  And this is the comments we're getting in our podcast all the time is, if there is a serious correction, we know that commercial gets hit harder, significantly harder than residential.
• 15:47
  Well, it depends on, again, the asset class.
• 15:49
  So what got hit really hard was a lot of the office buildings at the time.
• 15:54
  And one of the reasons were fund managers were a bit wild back then.
• 15:57
  They didn't have the same rules they have today.
• 15:59
  They were leveraged at like 60%, 70%.
• 16:02
  They were using cap rates that didn't make sense at the time.
• 16:05
  And basically, a lot of them went bust at the time.
• 16:07
  There was so many fund managers that were created, new ones that are still around today, that were born in 2009 to 2010.
• 16:14
  It's probably the most common startup period for a new fund manager in Australia's history.
• 16:20
  Like they all kind of started around that period because they were born out of the rubble of the time.
• 16:25
  And they, people were buying up buildings at a discount.
• 16:28
  And it's just like what you could probably do in the office market right now.
• 16:32
  Like the corrections already happened in many areas.
• 16:34
  There's been significant drops
• 16:36
  Because a lot of the super fund companies, they've been a bit too heavy in that space.
• 16:40
  They're just deploying capital without looking at it, looking at the numbers fundamentally.
• 16:44
  And we have seen falls in many areas.
• 16:46
  So will it fall a lot more?
• 16:48
  If the spree interest rate rises, there might be a bit of a softening for a while.
• 16:52
  But...
• 16:53
  There's a period of like over the next six to 18 months where the bottom is going to be there.
• 16:59
  You're never going to hit the bottom.
• 17:00
  Like if you buy a property and it drops for the next six months, does it matter if you're going to hold for 20 years?
• 17:05
  Like you just got to get a good deal.
• 17:07
  And that's what I say though.
• 17:10
  Every time I'm investing, every time a client's investing, just buy something you want to hold long-term.
• 17:15
  It's not about, because you're buying an income.
• 17:17
  So just look at the current tenancy mix.
• 17:19
  We represent a lot of family offices.
• 17:20
  These are billionaires, basically.
• 17:22
  And what the billionaires and family offices are doing right now is targeting properties that have lease security beyond the next few years.
• 17:30
  So a popular target is an office because you can get an above-average yield, but it might have a 10-year government lease in place.
• 17:37
  So it doesn't matter about the economy.
• 17:38
  That lease is set.
• 17:39
  You're backing in the government.
• 17:40
  They're going to be able to pay their bills, right?
• 17:43
  Exactly.
• 17:43
  So that's a way to alleviate the risk.
• 17:45
  And that's what the smart money is doing.
• 17:48
  If you're buying a sketchy one-year lease and the discount's not there, yeah, sure, you might lose money.
• 17:53
  But you can get away from that by just lease security, really.
• 17:56
  Because the listeners, what I'm referring to, 2008, 2009 GFC, commercial property, broadly speaking, dropped between 30% and 40% significant, the greatest they'd seen since the late 80s, early 90s devastation, where the residential market fell at that time between 5% and 7%.
• 18:12
  So there's an argument that suggests commercial property can fall greater, but at the moment, we're seeing a different story where Resi prices here in Sydney, where we're filming this,
• 18:21
  You know, there's evidence suggests on the ground that's falling residentially in the eastern suburbs somewhere between 15 and evidence up to 25%.
• 18:27
  Yeah.
• 18:29
  You've got a real estate business that operates in a resi space where, you know, you said you can never pick the bottom.
• 18:34
  Hindsight's when you see it.
• 18:36
  Where do you see that landscape?
• 18:37
  Well, like I know the 18-year cycle and as you know, every single cycle has a different reason for the crash.
• 18:44
  Like the last one was the subprime.
• 18:46
  You know, our banking is pretty tight at the moment.
• 18:49
  There might be some private debt risk out there.
• 18:51
  So, there could be some issues with developers coming up.
• 18:54
  But also, the last 15 years, we've seen some of the most substantial rental – sorry, resi growth ever.
• 19:00
  Like it's been –
• 19:02
  Even look at our industries.
• 19:04
  There's so many more investment firms out there that would never exist 30 years ago.
• 19:08
  So there's been a lot of marketing, a lot of pumping into this space.
• 19:11
  So Resi was a bit more top-heavy than commercial.
• 19:13
  So it's got more to fall.
• 19:15
  Commercial's kind of, I guess, COVID and even in 2022 when the interest rate rises, that knocked the wind out of the sails for a lot.
• 19:23
  That was peak, 2022.
• 19:25
  It has flatlined and then rents are starting to grow.
• 19:29
  So we're now in a rental growth cycle.
• 19:30
  Before it was just a cap rate compression cycle, which I rather rental growth because that's true value.
• 19:37
  When rents go up, so is the capital value.
• 19:39
  When people just start paying more because like- Cost of money is cheaper.
• 19:43
  Yeah, it's funny money.
• 19:44
  It's really, there's no intrinsic value being created.
• 19:47
  It's just the fact that people are pumping the value up because money's cheaper or sentiment's better or there's just more buyers pushing things up.
• 19:54
  So-
• 19:56
  I feel like Resi doesn't have those benefits at the moment, but in some areas it do, like some of the cheaper end of the market, like everyone's getting squeezed down into the lower price points.
• 20:07
  So technically there'd be more buyers for affordable houses at the moment.
• 20:11
  And rents are rising.
• 20:12
  So the government, what they were trying to do is make property more accessible for the affordable price points and keep rent subdued.
• 20:21
  And the opposite has occurred.
• 20:22
  You've got investors dealing with first-owned buyers in a rising rental market.
• 20:26
  We're not here to get political, are we, Reece?
• 20:28
  Oh, we try not to lock them, but it always seems there, I reckon.
• 20:31
  I know.
• 20:32
  It's the most – everyone on social media is quite political now, isn't it?
• 20:35
  It's very different.
• 20:37
  You're either an interest rate expert.
• 20:38
  That was about three years ago, and everyone was an economist.
• 20:41
  Yeah.
• 20:42
  Everyone – what was it before that?
• 20:43
  The pandemic?
• 20:44
  Everyone was –
• 20:45
  Everyone knew everything about flus and what do they call it?
• 20:49
  Vaccines.
• 20:50
  Vaccines.
• 20:51
  Anti-vax.
• 20:53
  Everyone just follows the algorithm these days.
• 20:55
  So it's political agendas at the moment.
• 20:58
  What about the rise of the buyers' agents?
• 21:01
  So I want to get your opinion on the resi space and actually commercial too.
• 21:05
  So I was looking back actually, you know, one of our earliest episodes, which would have been like –
• 21:10
  a year and a half ago we were talking about is the buyer's agent the new property spruiker in the space and a lot's happened since then right like you've seen some big agencies go under in the residential space you know from what we're hearing on the ground there's a lot of organizations that are doing some restructures as well
• 21:28
  Now, the reason I'm bringing up that story about the podcast we did, Lachlan, was Lachlan said sort of 18 months ago that, you know, it is just a repackaged spruiker back in the day that had the credit card up, go to the seminar, but we just fast forwarded 10 years and it was the residential buyers agent.
• 21:44
  What's your thoughts on that?
• 21:46
  And are you starting to see in the commercial space, you know, it's early days, right?
• 21:50
  We've only been, what, three, four months post budget.
• 21:52
  Yeah.
• 21:53
  Are you starting to see new players into that market and pretty speculative with their strategies?
• 21:57
  Yeah.
• 21:58
  Yeah, so to start with Resi, I started around 2015.
• 22:02
  Back then, when I did my market research at the time, there seemed like there was maybe 20 buyers agents at the time.
• 22:09
  I think it's over 6,000 now.
• 22:11
  So they're everywhere.
• 22:12
  And there's been some courses selling the, you know, quit the nine-to-five dream, all that kind of stuff.
• 22:18
  And it's attracted some good operators and obviously a whole heap of
• 22:22
  Terrible ones that you never see or hear about.
• 22:24
  So there is a mass exodus from it at the moment.
• 22:28
  It almost feels like maybe the finance planning industry where it was huge at one point and then it's just – it got harder with, you know, they basically did a royal commission on it.
• 22:40
  I think it might happen in res, like in the buyer's agent space at the moment.
• 22:43
  I hope it does, yeah.
• 22:44
  Because it needs to.
• 22:45
  There are people out there that are – like I could tell you so many things that I won't on this.
• 22:50
  But some of the behaviors out there and the patterns.
• 22:54
  But like high levels, there's some people that take kickbacks for the off-the-plan stuff.
• 22:58
  So if you're buying off-the-plan, don't do it through a buyer's agent because he's just a developer salesperson.
• 23:03
  That's all that is.
• 23:05
  If you're buying in a small regional town because of data, like that's just someone who's just –
• 23:11
  are going to pump the market themselves and they can literally control the volume.
• 23:15
  Like let's say you're going into a small regional city where there's 10 properties for sale.
• 23:21
  Like a good buyer's agent would do 50 a month.
• 23:23
  So you can buy that whole market and then next month you just pay 10% more.
• 23:27
  I just created 10% growth.
• 23:29
  Next month after that, let's just pay another 10%.
• 23:31
  Like, so all of a sudden, those people that got in early have made 20% equity.
• 23:35
  The founders.
• 23:36
  Yeah.
• 23:36
  And that's generally how it happens.
• 23:38
  And you just got to be careful because it will end badly.
• 23:42
  Like, it'll be propped up until people start selling.
• 23:45
  And you're only as good as the last sale, remember?
• 23:48
  If someone sells for a cheap price, that's going to become on the value is hit list.
• 23:52
  And, you know, all of a sudden the values start falling.
• 23:55
  And it has in most areas.
• 23:56
  They go up and then the sell down slowly starts.
• 23:59
  When interest rates go up, you know, there's more reason for people to sell.
• 24:03
  So people are realizing losses or just trying to get out with some of their profit.
• 24:08
  Then you're paying all this capital gains tax.
• 24:10
  You got to pay stamp duty to repurchase in.
• 24:12
  You got to pay a sales agent to sell.
• 24:16
  Either way, the profits aren't as good as they state.
• 24:19
  And this is the problem with the buyer's agent space.
• 24:22
  They don't really work on net figures, post-tax figures.
• 24:25
  It's really just talking high level like, oh, yeah, this value went up.
• 24:29
  How great.
• 24:30
  And it's like this.
• 24:31
  But on the flip side, there's some very good operators that get the off-market stuff.
• 24:34
  They negotiate as hard as anyone you've ever seen.
• 24:37
  Yeah.
• 24:38
  A lot of the good buyers agents are pretty emotionless.
• 24:41
  They don't care if they lose a deal.
• 24:43
  So even when I negotiate for myself buying, I'm not as good of a negotiator when it's for me because I'm invested in the deal.
• 24:52
  I'm like, yeah, look, I'll just chuck another half a mil on this thing because I can and I want the deal.
• 24:57
  But a good buyers agent would just say, no, just don't.
• 25:00
  There's another deal coming next month.
• 25:01
  Yeah.
• 25:02
  Creates a bit of self-control.
• 25:05
  And yet the commercial space, it's different.
• 25:07
  It's like we control about 61% of the market share at the moment on our last research.
• 25:13
  So we are the market.
• 25:15
  We're 100% in New Zealand at this stage.
• 25:17
  And we're seeing a lot of Resi guys going, oh, we do commercial now.
• 25:22
  And they advertise it.
• 25:23
  They talk about...
• 25:26
  you know whatever expertise they think they've got in it the reality is most don't transact like they they try and um it's a tough spot it's a low volume world there is really not much out there worth buying so the resi buyers agents have been coming for commercial for about three years now so this is not new the budget hasn't changed much so yeah like touch wood where we haven't been affected by the resi guys at all to date
• 25:50
  Where should people be concerned?
• 25:51
  Because we had Cal Doggett, who's in WA.
• 25:55
  Commercial funds was his base, syndication.
• 25:58
  And he said he's getting calls for training from resi buyers agents, just trying to flip the hat and become a commercial buyers agent.
• 26:05
  For a sophisticated, unsophisticated consumer or client, what should they look out for?
• 26:11
  Because people in the resi buyer space have got really good at marketing.
• 26:15
  So everyone's got really creative, they're dominating meta ads.
• 26:19
  They put a story, like you said, they wrap a good story around a regional market that you're going to get double-digit returns year on year.
• 26:24
  And it's my feed, I'm sure your feed's the same.
• 26:27
  You're just constantly seeing things that are generally too good to be true.
• 26:30
  But in the commercial space,
• 26:32
  People don't fully understand what they're getting, the tenant profile, the risk associations.
• 26:36
  If you do have a vacancy, the difference between a gross and net yield.
• 26:40
  So what should an average punter that's thinking about, okay, I think it's time for commercial, who's it right for first and foremost?
• 26:47
  And what should they look out for not to get dragged down a garden path and go to the wrong operator who buys them a dud asset?
• 26:54
  It's sort of common sense.
• 26:55
  Like how long have they been operating in this space?
• 26:57
  Like we've been operating for 12 years in commercial and it's taken so long to build these contacts.
• 27:02
  And even in New Zealand, when we first went there four years ago, like the agents were like, no, we're not going to give you deals because we'll just send it to our buyers direct.
• 27:11
  And they didn't even know how to handle a buyer's agent over there.
• 27:14
  Yeah.
• 27:15
  Slowly but surely, we explain, we do the due diligence, we qualify the buyers, we've got a long history of transactions.
• 27:22
  We've done nearly 7,000 deals to date.
• 27:25
  So when a new Resi Buyers Agent comes up into this space and calls up one of the usual selling agents that we've worked with, we actually get screenshots of all their emails, showing their briefs.
• 27:35
  So I know exactly what the Resi buyers agents are doing out there.
• 27:38
  They're generally finding a sub 1.5 mil asset.
• 27:41
  They want a 6% yield, three-year lease.
• 27:44
  They literally specify their brief.
• 27:45
  And there's no chance they're going to get that because if that was out there, that was good.
• 27:50
  There's my company plus a few others that would have eaten it up 10 times over, plus local buyers who know sales agents.
• 27:57
  They'll eat them up before that.
• 27:58
  You're not going to get some...
• 28:00
  One small company just get access to this stuff.
• 28:03
  Access is key.
• 28:05
  Residential, you can kind of get away with it because there's 600,000 transactions a year.
• 28:09
  Commercial, like it's 15,000.
• 28:11
  Last year, it was about 10.
• 28:12
  Like there's hardly anything going on in this space.
• 28:14
  It's very tight.
• 28:15
  So, yeah, you need relationships and depth of deal flow as well.
• 28:21
  Otherwise, yeah, not much happens.
• 28:23
  Yeah.
• 28:23
  And then who's it right for?
• 28:25
  Commercial's right.
• 28:27
  It's not for the masses, is it?
• 28:28
  Where does it sit in your eyes in terms of the profile of the consumer that should be thinking about commercial?
• 28:35
  So like maybe someone who's bought two, three houses or, you know, investments, like it's time to start thinking about commercial because if you keep going down the housing route, you're just going to get so negatively geared, you simply won't retire.
• 28:48
  That's what happens.
• 28:49
  This is why no one's really retiring from residential at the moment.
• 28:52
  When you...
• 28:53
  you get sold the dream so often on social media, like actually ask, like you would know better than anyone, like how many people have finished work and living off their portfolio?
• 29:04
  You probably haven't met anyone.
• 29:06
  Even the people that have founded those companies are getting paid by their company.
• 29:09
  So, yeah,
• 29:10
  You got to get out of the resi quicker than you think.
• 29:13
  You have to start there.
• 29:14
  I don't think commercial is right for a first time investor.
• 29:17
  You're not conditioned to deal with vacancy.
• 29:19
  You're not conditioned to deal with just the complex nature of how an industrial market moves versus the resi.
• 29:28
  It's a whole different spectrum of knowledge that you need to get your head around.
• 29:32
  Once you've bought a few houses, you've dealt with some repairs, you've dealt with vacancies in housing, which might only be a four-week vacancy, not a four-month vacancy, you can start to kind of get the tough skin to deal with commercial because you will make more money in commercial, but the risk is higher.
• 29:49
  That's why the yields are higher.
• 29:51
  So you've got to avoid the problems.
• 29:53
  You've got to know what to look for.
• 29:55
  And what are those risks?
• 29:56
  Well, you're going to deal with more concentrated vacancy.
• 30:00
  So concentrated vacancy means over a 10-year period, it might only go vacant once or twice, but it could be six months all at once.
• 30:07
  You need to cash buffers in place to be able to say, if that's vacant for six months, I don't have to give up this property.
• 30:12
  And most resi investors who are redlining don't have cash buffers.
• 30:15
  They're going up to their max budget each purchase.
• 30:19
  Their mortgage broker's got a qualified loan, and they're not going to buy half-price deals.
• 30:24
  They're going to go up to where they can afford.
• 30:27
  That generally just means less cash flow, and that's okay because a lot of the vacancies are going to be less than four weeks.
• 30:34
  Maintenance can get you a lot worse off in resi.
• 30:37
  In resi, okay.
• 30:38
  Because the tenant pays maintenance.
• 30:41
  Yep.
• 30:41
  Capital works are different.
• 30:42
  So it's like, that's so easy to check.
• 30:44
  Just get someone on the roof, drone fly out.
• 30:46
  Like, just make sure the property is okay.
• 30:48
  No capital works is needed.
• 30:50
  Because all general maintenance is paid by the tenant.
• 30:53
  The tenant's probably got an expensive fit out in the property.
• 30:56
  That's all their responsibility.
• 30:57
  The insurance is paid by the tenant.
• 30:59
  Like, insurance is a big problem at the moment because premiums keep going up.
• 31:03
  So those, like, I've still got about 15 resi properties and, yeah, my, yeah, the returns are just getting higher and higher.
• 31:11
  Sorry.
• 31:11
  The outgoings are getting higher and higher and yeah, sure.
• 31:14
  The rents are going up, but you know, when insurance goes from three grand to six grand on a deal, it's, you know, it does make a big impact.
• 31:23
  Yep.
• 31:24
  So with commercial risks, uh, extended periods or more concentrated periods of vacancy, where else do people need to be concerned?
• 31:31
  You said there is more risk.
• 31:32
  If you don't know what you're looking for and you buy the wrong site, that's where you get really punished.
• 31:36
  So the right commercial property is way lower risk than residential.
• 31:40
  Imagine you buy, I don't know, like a Woolworths.
• 31:44
  Let's use a smaller example.
• 31:45
  Something like a doctor studio or a dentist that's been there for 20 years.
• 31:51
  Like where I went as a kid to my dentist, they're still there.
• 31:55
  Yeah.
• 31:57
  And the doctor's still in the same spot too.
• 31:59
  When I was literally a baby going to this place with my mom, like it's still there.
• 32:03
  So if you buy the right commercial asset- They're always going to pay their bills.
• 32:06
  Tenant for life.
• 32:07
  Yep.
• 32:07
  That's not, I don't see the risk there.
• 32:09
  But if you're buying a sketchy, some kind of restaurant that's got an operator that's had one year business experience and maybe they're new to the country and they don't understand all the, like that could go vacant.
• 32:21
  And...
• 32:23
  in this economy, filling a vacancy where maybe the foot traffic wasn't as good enough.
• 32:28
  Retail is a good analogy where you might have a hairdresser right next to Woolworths where there's massive foot traffic.
• 32:34
  That hairdresser is going to pump all day.
• 32:36
  It's a great business.
• 32:37
  Imagine you're like 10 meters away from it, but it's in a back alley.
• 32:41
  There's no one going to rent that unless it's for dodgy services, basically.
• 32:45
  So that means the vacancies can be longer, the finance might be harder.
• 32:51
  Even though it might look like a good deal on paper because the square meter rate is significantly cheaper, you wouldn't touch it with a barge pole.
• 32:58
  So that might seem like, to me, it's common sense, but if you're a first-time investor, you might think that's a good deal because it's half price.
• 33:06
  And it's the tenant profile, right?
• 33:08
  You've spoken a little bit about this today, but a lot of these, I think a lot of people that have experience in resi don't understand the importance of making sure that you're buying a cash flow, you're investing in the person who's going to pay their rent.
• 33:20
  So understanding their business dynamics, how important is that, making sure that you've got confidence in them being able to pay their bills
• 33:28
  You know, are they going to survive a COVID, a recession, those sorts of things.
• 33:33
  Well, we look at history of payments, and sometimes you can go back to COVID, see what happened.
• 33:39
  See if they claimed, you know, what were they claiming back then?
• 33:42
  I can't even remember.
• 33:43
  But there was also like JobKeeper.
• 33:45
  JobKeeper, yeah.
• 33:45
  Yeah, there's all sorts of benefits there.
• 33:49
  Was rent deferred?
• 33:51
  Stuff like that, so you can check.
• 33:53
  If they got through all that, then they're probably a good tenant.
• 33:55
  A lot of tenants vanished in that period as well.
• 33:57
  So those zombie businesses they used to talk about got wiped out.
• 34:02
  And the good ones stayed and got a lot stronger since then.
• 34:05
  So we call up the tenant.
• 34:08
  We find out how old the owner is.
• 34:10
  Do they have a succession plan?
• 34:12
  What's their competitor landscape look like?
• 34:15
  What are other vacancies in the area look like?
• 34:17
  Do they need more space because they're growing too quick?
• 34:20
  Headcount versus last year versus the year before that.
• 34:24
  And you can kind of make an educated guess that this business is stable enough, profitable enough to want this space for at least the next five years.
• 34:32
  And that's what our due diligence team does.
• 34:35
  There's a big checklist that we go through.
• 34:37
  It's different for every asset class, by the way.
• 34:40
  But you also, we've got the luxury of seeing what, because we've done 7,000 odd deals, we know what our current clients in that market are dealing with.
• 34:49
  So if we're seeing like vacancies starting to pick up or tenants not paying because business is tough, you don't go into that same area.
• 34:56
  We've got the live feed on the market.
• 34:59
  And then there's other markets where,
• 35:00
  Rents are going up quicker.
• 35:01
  And we'll see it six months before it hits the data sets.
• 35:05
  And yeah, just knowing what the market's doing almost goes beyond the tenant because if the tenant left, you'll fill it quick.
• 35:11
  And that's...
• 35:12
  There's an insomnia, I can bet you'd rather the tenant to leave and you can check up the rents, right?
• 35:15
  Yeah, and that's the biggest, most common value-add play right now.
• 35:18
  Rents, especially in industrial, we're seeing rents increase like 20%, 30% above the current rate.
• 35:24
  So if you buy a good deal...
• 35:26
  And then the rents are like 30% below market, 30% upside.
• 35:30
  Like that's more than any developer is going to get.
• 35:32
  And all we're doing is changing the tenant and renegotiating a lease.
• 35:35
  Like there's risk in it, but not 18 months of build risk.
• 35:39
  So yeah, it's a good spot to be in and to look at.
• 35:43
  What about the residential market?
• 35:44
  You know, you mentioned their volume across your residential businesses is down.
• 35:48
  Yeah.
• 35:49
  I'm reading between the lines there with some comments you said regarding some of those regional plays with some of those institutions that probably are no longer with us or maybe, you know, not to the same size.
• 36:00
  Where are you seeing – we've had a lot of rate rises over the last – we've had a lot of headwinds from a resi perspective.
• 36:05
  Yeah.
• 36:06
  You're obviously still buying and seeing opportunity.
• 36:09
  Where are you seeing the best opportunities in –
• 36:12
  in resi, I guess, and moving forward into sort of 2027, whether that's, you know, location or asset type or fundamentals, where are you seeing the opportunity in the moment?
• 36:21
  So one of the best fundamentals to hit is just buy below replacement costs, whether that's an older unit in a good market, maybe a house in a regional area that's,
• 36:31
  you know basically because build costs keep going up so if you buy below replacement costs you your new competitors can't compete with you and when i say a competitor a new build because if you can build cheap when they're making profit margins then yeah it's not a good spot to be in like because your growth is going to be subdued until that stock gets absorbed and
• 36:51
  So, where that is about, like, you wouldn't be buying high-rise units anywhere in Australia because that's pretty much the only way they're going to solve this housing crisis by just building 20, 30 store many towers in the middle ring.
• 37:03
  So, don't touch that stuff.
• 37:04
  The strata will kill you.
• 37:05
  The growth is going to be...
• 37:07
  Pretty low.
• 37:08
  Just the net yields are just not good enough for the risk.
• 37:12
  Freestanding houses are great, but you've got to be careful.
• 37:13
  The cash flow is not too bad.
• 37:15
  So this is where there's a trade-off that, yes, the demand will always be there, but if you're negatively geared to the point where it might be $40,000, $50,000 a year to hold the thing,
• 37:25
  You need 40 to 50 grand of growth just to break even.
• 37:30
  Always work back on the net figures.
• 37:32
  And so you've got to find a deal where the cash flow is still okay.
• 37:35
  And then, yeah, I love a freestanding house.
• 37:37
  It's an old school way of investing that'll work forever.
• 37:41
  only if the yield is good enough.
• 37:42
  And luckily for the investors and unluckily for the tenants, rents are going to go up a lot over the next few years.
• 37:49
  And this is where the, even if negative gearing is never reinstated, I think there is an opportunity in this space where you might buy and then the rents are going to play catch up and yields are eventually going to sit higher than they used to.
• 38:02
  So sub 4% gross yields is a risky play, you know, but those 4% gross yields might turn into a 6%, 6.5%.
• 38:11
  you know, then you're back in the game.
• 38:13
  And that's where the standard growth trajectory will start up again.
• 38:16
  One of the last kind of daggers, I would say, in terms of the post-budget or the resi market was the self-managed super fund ban from a residential standpoint.
• 38:27
  I know it's early days, but have you seen an influx of that from a commercial side of things at the moment?
• 38:33
  And are there people coming to you guys misinformed about what they can and can't do?
• 38:38
  Yeah, we saw a big spike in our resi like we did.
• 38:42
  We did a lot of deals that last month.
• 38:44
  More in resi than commercial, surprisingly, but a lot of super fund investors are just putting it into funds like, you know, the Reethean Capital Syndicate because –
• 38:55
  It's a high yield play, so it's good to not have much tax on that.
• 38:59
  And there's obviously capital growth on those as well.
• 39:02
  And most importantly, it's completely passive.
• 39:05
  So a lot of the deals that you'd be buying in commercial kind of enter that risky entry-level price point.
• 39:11
  So unless you've got a lot of money in your super, buying standalone deals is a bit trickier at the moment.
• 39:18
  And then you've got to be active on it.
• 39:19
  You've got to manage the mortgage on it.
• 39:21
  Like it's...
• 39:22
  Sometimes you rather just put the cash in something and let it sit and get a return on it.
• 39:27
  Scott, before we get you out today, I've got some quick fire questions for you.
• 39:32
  So keep it as brief as possible.
• 39:35
  So I won't go one word answers, but we'll keep it as precise as possible.
• 39:40
  Commercial or residential for the next decade?
• 39:43
  Pick one.
• 39:44
  Commercial.
• 39:45
  Office space dead or come back?
• 39:49
  Prime will come back.
• 39:50
  Secondary dead.
• 39:52
  Rank them industrial retail office.
• 39:56
  Retail industrial office.
• 39:58
  The yield number that makes you say yes.
• 40:01
  Above 5.75 for premium.
• 40:04
  What's the biggest myth about commercial property?
• 40:07
  The gross rates aren't as good as resi.
• 40:10
  Finish the sentence.
• 40:11
  Residential investors don't realize commercial...
• 40:15
  They don't realize how low risk it can be if you do it right.
• 40:18
  Everyone sort of puts it in the two-hard basket because they don't know enough about it.
• 40:22
  Lack of education is the biggest problem in this space, which is changing.
• 40:25
  Like when I started, there was no books, no podcasts, nothing in Australia.
• 40:31
  There was a little bit in America at the time, but yeah, it's all different now.
• 40:34
  People know about this asset class, so...
• 40:37
  It's becoming mainstream.
• 40:38
  If anyone listening to this or viewing this wants us to get more guests like Scott O'Neill here, hit like and subscribe.
• 40:46
  Helps us grow the channel.
• 40:47
  Scott O'Neill, thank you so much for coming on the Follow Property Podcast.
• 40:50
  Anytime, boys.
• 40:51
  Thanks, man.