Low-yield property deals an investment ‘suicide’: Quintessential Equity
Australian Financial Review
15 June 2017
Quintessential Equity boss Shane Quinn believes some commercial real estate investment was “suicide. I could not be any more blunt”. Mal Fairclough
Quintessential Equity boss Shane Quinn says investors buying commercial property on record low yields were risking investment “suicide”, adding his voice to growing concerns about a bubble building in the sector.
He told The Australian Financial Review he had “grave concerns for assets purchased on very tight yields from investors looking for cash flow”.
“Cash flow is the first thing that you can lose in property. Investors are under a lot of pressure to retain rental levels and cash flow streams,” said Mr Quinn who is regarded as one of the country’s most astute property fund managers.
“We’re near the top of the cycle. Our thinking was that we would never see the low yields achieved in 2007 [prior to the GFC] and that it was a once-in-generation thing. But they’re now probably 20 per cent stronger and at all-time lows in Australia.
“Its a dangerous place [for small investors] to be. I scratch my head at some of the prices being paid for assets that require a lot of capital expenditure and are on short WALEs [weighted average lease expiry].
“They are not pricing in the risk. It’s suicide in my eyes. I can’t be any more blunter than that,” he said.
Concerns about a potential bubble building in the commercial property market have been growing louder as yields have tumbled on sought-after assets like childcare centres, supermarkets, take-away restaurants and petrol stations.
Last month, a new record low 3.6 per cent yield was achieved for a $4.3 million G8 childcare centre in Vaucluse in Sydney’s eastern suburbs, which sold at auction alongside a Red Rooster in Brisbane, which sold for $3.35 million on a 4 per cent yield and a retail and office building on Carlisle Street in St Kilda – where vacancies are rising – which sold for $1.6 million on a 4.2 per cent yield.
Many investors are leveraging up their self-managed super funds as they compete for assets that generate better yields than bank deposits with ATO figures showing that since December, property investments held in DIY funds exceeding cash for the first time at $162 billion.
Senior property executives and fund managers including Sentinel Property Group’s Warren Ebert, Arena REIT’s Bryce Mitchelson and Folkestone Education Trust’s Nick Anagnostou have all warned of a downturn in the commercial property market as funding costs rise and banks tighten up their lending practices.
“The fundamentals have gone out the window. Prices have got silly. These investors maybe all right for a few years, but if interest rates go up what does that do to them?” Mr Ebert told the Financial Review.
The Reserve Bank, in its latest Financial Stability Report, also flagged concerns about the commercial property market noting conditions had continued to strengthen in Sydney and Melbourne with yields at “historically low levels”.
“Funding will be the game changer over the next nine months,” Mr Quinn said.
“It’s getting very difficult to fund assets on a sub-three year WALE. Loan-to-value ratios are being reduced substantially and banks are looking for landlords and purchasers to take into account CAPEX and incentives when funding a deal and to have monies set aside for potential risks.
“There will be quite a few people caught out, which will mean great opportunities for us to purchase assets that others won’t be able to fund through debt,” he said.