Business growth drives small shed boom, but rising rates cloud horizon

Nandal settled on his shed in November last year for $1.45 million. “We needed a bigger space,” he said.

While scale was one factor that drove his purchasing decision, another was the desire for flexibility in adjusting the space to suit his business needs.

He plans to add a mezzanine and expand storage for the consumables – plastic bags, methadone bottles, labels and a new line of organic cosmetic products – he supplies to 300-plus chemists.

Smaller warehouses are frequently purchased through self-managed super funds (SMSFs). Tax Office figures show self-managed super holds $71 billion in commercial real estate.

SMSF Association deputy CEO Peter Burgess said acquiring a property in a self-managed fund and leasing it back on commercial arms-length terms is a popular and valid strategy for business owners.

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“There are also tax benefits of holding property in the fund. Any income the fund receives are taxed at the concession 15 per cent rate. When the asset is eventually sold, if the members are in the pension phase at that stage, there is no capital gains tax,” he said.

The most recent data from Real Capital Analytics also shows sales volumes of smaller warehouses are now tapering, in line with worries about inflation and upward pressure on interest rates.

Commercial property buyers, sensitive to yields, are eyeing the Reserve Bank’s increase in the official cash from 0.1 per cent to 0.35 per, the first in the midst of an election campaign since 2007, with disquiet.

“That’s on everyone’s mind at this stage. So far, we feel comfortable,” Nandal said. Of more concern is the rising cost of fuel for freight couriers, passed on to customers, that he uses to deliver pharmaceutical goods.

“It will get to a level by the end of the year where we will have to increase prices. So far, we have been able to hold on, but its getting harder and harder,” he said.

Colliers International’s Mitch Purcell said the sub $5 million industrial market continues to have elevated sales rates.

“Vacancy across our market is below 1 per cent. The majority of stock is either being sold off the plan or leased prior to practical completion,” he said.

“We are not seeing a significant impact from rising rates because of the amount of pent-up demand and the lack of available stock.”

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