Why investors are switching from residential property to the commercial market

Property investors are losing interest in the booming Western Australia residential market after significant price rises, and some are switching their focus to commercial property to better suit their budgets. These are two of the findings of the Australian Property Investor (API) magazine’s Q2 2024 Property Sentiment Report, which is based on a survey of investors, landlords, and property buyers.

The report revealed other interesting trends, including positive general market sentiment falling below 50 percent of survey respondents for the first time in 12 months; expectations of continuing price rises falling from 84 percent to 70 percent; and the intention to buy dropping significantly because an interest rate cut in the short term is no longer expected. Indeed, earlier this month, Reserve Bank Governor Michele Bullock indicated a rate cut within the next six months is unlikely.

The API report highlighted waning interest in Western Australia, which had the strongest growth in home values in FY24. The median home value rose by 23.6% to $757,399 in Perth and by 16.6% to $514,642 in regional areas, according to CoreLogic data. In Q1, 24 percent of investors rated the mining state as their preferred location for investment. This fell to 16 percent in Q2, which API says is one of the largest changes in sentiment it has ever seen across its quarterly surveys.

Interest in NSW rose by 6 percent to 26 percent in the second quarter. Growth in home values was comparatively moderate in FY24 at 6.3 percent in Sydney and 4.1 percent in the regions. Queensland remains the favourite investment destination among 33 percent of investors, up from 32 percent in Q1. Home values rose by 15.8 percent in Brisbane and 12.2 percent in regional Queensland in FY24.

While residential property remains the most popular type of bricks-and-mortar investment that buyers are considering purchasing over the next year, the survey revealed increased enthusiasm for commercial property. In the second quarter survey, 13 percent of respondents said they wanted to buy a commercial property over the next year, up from 7 percent in the first quarter.

“This near-25 percent decline in just three months is an extension of a downturn that has been taking place since the Q4 2023 survey, when houses were at 45 percent,” according to the API report. “As affordability concerns mount, detached homes are now out of reach for many. The increasingly publicised strong performance of commercial property, particularly industrial assets, along with easier access to this investment vehicle through a proliferation of fund and syndicate offerings, has put commercial firmly on the radar of investors.”

Among those still targeting residential property, interest in standalone houses dropped from 39 percent in the first quarter to 30 percent in the second quarter. Interest in apartments increased slightly from 23 percent to 24 percent, and interest in townhouses and villas was steady at 18 percent.Investors also signalled a renewed interest in building, with 10 percent of respondents now intending to buy vacant land, up from 5 percent last quarter.

This may be a reflection of construction costs easing after years of unprecedented growth. The cost of building a typical home rose by just 0.5 percent over the past 12 months, according to the latest CoreLogic Cordell Construction Cost Index report. This was the slowest growth in 22 years. “The growth in costs has finally returned within normal margins, however the price of construction is not falling and building or renovating remains almost 30% more expensive now than pre-COVID after an extended period of escalating costs,” said CoreLogic research director Tim Lawless.