Commercial property has long remained a bit of a mystery to many. There’s less focus on it in the mainstream media and when we do hear about commercial property, it’s usually about large retail shopping centres and CBD office towers.
But what about the kind of commercial property that is within reach of a “normal” investor?
Increasingly, Australian property investors are looking towards commercial property for the various benefits that it can provide, of which there are many.
It’s a numbers game:
Commercial property is typically purchased based on the numbers and net return, even if it will be owner occupied. What we mean here is that a sales price is derived from the net rental that is currently or could reasonably be expected to be paid by a tenant net of any property expenses (outgoings). Commercial property is generally valued based on its return, rather than a residential property which must increase in capital value in order for the owner to profit.
Commercial rents are usually (at least) indexed to inflation. It is not uncommon for increases to be fixed at 3-4% per annum. Either way, with rental increases in commercial properties you can be assured that the market is unlikely to be getting away from you.
In residential property investment, yields are quoted on a gross basis ie gross rental divided by purchase price. Within the Brisbane and South East Queensland market (houses) gross yields are in the order of 3.5 – 4%. Once you factor in outgoings the net return is significantly lower in the order of 2 – 3%.
Commercial properties by contrast are always assessed on a net basis, to reflect the true return after expenses. Net yields for commercial properties vary greatly by asset class but for many properties returns of 6 – 8%+ are achievable.
Passive income & ongoing management:
One of the greatest benefits of commercial property is it’s ability to create passive income. Commercial properties by their nature are typically less hands on to manage than residential (this is not the case for all commercial properties ie multi tenanted/ retail centres). You will generally find that larger single tenanted commercial properties on longer term leases require little ongoing input from their owners – they tend to tick over.
It is, however, vital to pick the right properties to invest in. A property with underlying issues can be an ongoing nightmare to manage as well as presenting significant financial implications.
Finding positively geared residential investments has become more difficult, even with falling interest rates.
Commercial property leases typically have much larger security amounts provided by the tenants to ensure their obligations are met.
A 6 month bank guarantee or cash bond is not uncommon and we generally see a minimum of 3 month bonds in any lease agreement. Compared to a 1 month residential lease bond, commercial property owners can enjoy some additional comfort and cash buffer. This, however does not mean that arrears or other potential issues with tenants should not be taken seriously and dealt with quickly and proactively should they arise. Rental debts can quickly add up.
When a commercial lease deal is struck the right way, the outgoings or expenses of the property can be paid for in full or at least in part by the tenants. This is very different to residential leases of which the landlord will always pay for the outgoings themselves.
The depreciation benefits of commercial property are generally a lot higher, with greater tax deductions stemming from tenancy fitouts, capital equipment (eg. Air conditioning units) and other items. These can add up significantly.
More ways to add value:
Residential properties are typically left to the whims of the market’s capital growth. Of course a house can be refurbished but other value add opportunities are limited.
Commercial properties provide additional opportunities to see immediate increases in value such as renegotiation with tenants to extend current leases, leasing at a higher rate, or changes in zoning.
We do not wish to suggest that commercial property investment does not come without risks. In fact it is the higher risk of commercial property that allows the higher returns. While returns can be much higher, risk can be increased significantly if you buy the wrong property.
Comparatively, a bad residential property in a good growth location will tend to do well in the longer term. Therefore it is CRITICAL, to ensure you do all you can to research and understand the commercial property you are buying to reduce your risk exposure.
Some of the negative considerations of commercial property are:
There are many benefits of investing in commercial property, and with a considered approach of selecting the right properties, we believe that these benefits far outweigh the negatives.
It is however the complexities and added risk of commercial property that demand the assistance of experienced professionals and partners. Whether it is solicitors, accountants, property managers or an experienced commercial buyers agent – the experience that you will gain from working with people who understand the intricacies of commercial real estate will heavily reduce your risks when going through the process of purchasing a property.
We can assist clients to purchase properties of all types across Brisbane and South East Queensland.
Our background and varied experience across all aspects of commercial property gives you a unique advantage when sourcing commercial properties, assessing their value and potential risks, as well as practical insight into the ongoing management of the asset.
SALES/LEASING: We have a depth of experience selling and leasing commercial properties across South East Queensland – we know exactly how selling agents operate and how to best work with them for your benefit.
Further we know exactly what goes into sourcing suitable tenants for commercial properties, the realistic timeframes and incentives required – information which selling agents will often underrepresent.
VALUATION: Having worked within the commercial valuations sector we have a thorough understanding of technical valuation of office, retail, industrial and going concern assets.
PROPERTY MANAGEMENT: With significant hands on experience in property management we have a deep understanding of the dynamics of these types of properties and what goes into the ongoing management of the assets. Further we better understand where things go wrong, red flags that must be considered when purchasing and hidden risks that many people don’t consider when buying commercial properties.
DUE DILIGENCE PARTNERS & NETWORKS: Combining our experience in the commercial property space in Brisbane and wider South East Queensland over many years with the relationships and networks that we have developed, we can leverage these partners to effectively assess buildings and ensuring your interests are protected during the buying process and into the future.