The Upsides of Commercial Property Investment - April 2021
2021 looks like it’s going to be ‘The Year of the Property Investor’. It seems just about everyone holding real estate is enjoying an extraordinary run of capital gains.
Media is constantly reporting about high auction clearance rates, lack of supply and unfathomable demand. And then there’s those ‘barbecue stopper’ discussions where every family member and friend has an opinion on the money to be made from renovation prospects, gentrification and infrastructure booms.
But there is one thing among all this discourse that get short shrift in my opinion, and it’s this: Residential real estate isn’t the only type of property available to Aussie investors.
In fact, for a certain demographic, acquiring commercial holdings is a smart decision that can deliver lucrative results.
We’ve seen the rise in mum-and-dad landlords exploring the possibilities around commercial investment. As interest in the sector continues increases, so does the potential risks for those unfamiliar with the commercial space.
So, we saw an opportunity to assist by taking on specialist commercial property buyers’ agent, Alberto Da Grava, to help our clients. Alberto said there’s plenty to be gained by sophisticated investors who choose to add commercial holdings to their portfolio.
Here are his thoughts.
Often residential property investors adopt a wait-and-see strategy. The ideal scenario sees their residential properties generate enough rent to at least cover all holding and maintenance costs. That way, they can service their commitment while waiting for the inevitable rise in value.
With commercial, it’s a flip side equation.
Commercial is an investment class which can gross five to seven per cent rental return on its purchase price. This means with interest rates at historic lows, investors are able to secure lending at an extraordinarily low cost. If you can borrow funds at two per cent and invest them in an asset providing six per cent rent return, you’re already well ahead.
This is why commercial often appeals to investor who are well advanced in their wealth building strategy – especially those approaching retirement. These landlords will have made substantial capital gains in residential and are now looking at ways to boost the income from their portfolio as they transition away from work.
- Tenants cover outgoings
Tenant obligations in commercial investment are very different to those in residential.
Commercial leases normally require tenants to cover all outgoing for the premises – both theirs (utilities) and the landlord’s (rates, taxes and levees). In addition, tenants are usually responsible for repairs and maintenance that aren’t structural or capital items. Tenants also insure the premises.
In short, the rent paid by tenants is far a net figure than a gross figure. As a commercial landlord, you’ll be insulted from a multitude of costs, giving you more surety about the regular income you receive.
- Pure investment play
Part of the challenge around residential investment is that you are dealing with people’s homes where they want to feel safe and secure. Also, you will occasionally hear of bad tenants and it can be difficult for landlords to be 100 per cent comfortable their property isn’t being misused or not looked after.
Face it – residential real estate has an emotional element. This is far less the case with commercial.
Whether you’re dealing with tenants, sellers, property managers or selling agents there is – for the most part – a professional detachment around the asset.
It’s easier to assess value and form a clear picture on what things are worth for sale or rent in the commercial realm. There is less to and fro, wailing and gnashing of teeth. There are fewer emotional triggers and premiums based on the heart, not the head.
In addition, there’s a smaller network of professionals working in the commercial sector. Commercial specialists are well connected, and most are fully aware of applicable sales and rental evidence used for comparison purposes. This tends to make transactions more clinical and, ultimately, less stressful.
- Long leases
To some degree this is both a blessing and curse with commercial. Tenants tend to take leases over multiple years, and conditions often include an option to renew for a set number of years after the initial period expires. In addition, rents are regularly reviewed and rent increases (either to market, set to CPI or based on a fix percentage) occur at predetermined dates.
The downside is that when a property does fall vacant, it can take an extended time to secure a new, suitable tenant for your commercial asset. Tenant quality and security are crucial to maintaining your property’s value and growth prospects. As such, ensure you are relying on good, professional advice when analysing a commercial opportunity.
Commercial property investment isn’t without risk of course. There are nuanced considerations that mut be taken into account. That’s why it’s essential to have an experienced commercial buyers’ agent in your corner when looking to purchase. The right expert will help you avoid the pitfalls and maximise the results.
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