Demystifying commercial property investment

Some people think commercial property is only owned by people in the BRW Rich 200 list, companies and big institutions.

Not so.

And if it delivers high rental yields and long-term leases, commercial property should sound very appealing to many investors.

Property types and buy-in price points for commercial property are as diverse as they are for residential property.

Fear of the unknown is confining many investors to the residential market. However, the reality is that commercial real estate is nothing to be afraid of.

Let’s try and simplify things.

What is commercial property?

It may be shops (retail), factories and warehouses (industrial), and office space (commercial).

Retail - This doesn’t have to be mega shopping centres and malls. The local shopping strip can present a wide variety of smaller but by no means less profitable investment options. Appeal comes with good exposure, good parking and easy access.

Office - Businesses will always need office space. Strata offices have proved popular as they can provide multiple income streams.

Industrial - All sorts of businesses need warehouses, workshops and depots. Just think of the panel beater or the picture framer. Yields tend to be good, though growth is tied directly to the economy.

Car parks - If you’ve ever tried to park in the middle of a city, you’ll know how in demand these are. Whether a 400-space parking building, a small lot or a single space in an apartment block, space is being snapped up.

Storage - Storage units are a popular small-scale investment option. Low maintenance costs alongside growing demand has seen their appeal increase. Storage provides a wide range of investment opportunities based on the size of the storage facility.

What’s the difference between residential and commercial investment?

Consider residential property as a high growth, low yield investment vehicle and commercial property as a higher yielding but low growth investment.

Commercial property tenants usually pay all the outgoings such as rates, taxes and insurance. Because they generally conduct their business from the property, they tend to maintain it well. Leases for commercial properties tend to be for longer periods, often three to five years. Most leases require the tenant bring the property back to its original condition at the end of the lease.

That said, when vacancies occur in commercial properties, they are often vacant for considerably longer periods than you might expect from a residential property. Think about any vacant shops you may have seen.

Deepen Khagram specialises in service stations and retail developments and has successfully listed and sold properties across a broad range of assets including pharmacy and hospitality businesses, shopping centres, service stations, fast food outlets and childcare centres. He also regularly negotiates sales for ‘mum & dad’ investors and SMSF investors. For instance, a suburban business that attracted 30 enquiries and multiple offers sold for $500,000. An events & functions business in a CBD precinct, where the vendor was a mum with three children, sold for $380,000.

Smaller assets are given no less attention, says Deepen who has these words of advice for smaller-scale commercial investors:

• If selling, interview at least three agents and choose the one who gives you confidence in their understanding of your objectives and the product they will be selling.

• If buying commercial property, research extensively on the asset class that you are looking to buy, the quality of the tenants, length of leases, future repairs and maintenance etc. Choose an agent who can guide and advise you through the process.

• If you are not comfortable in managing the asset, ensure that you choose the right company that has experience in managing the scale and type of asset you are acquiring. Let the experts handle the admin and maintenance of your asset in a professional manner.

Commercial property investors need to know where they stand with lenders and mortgage insurers too.

Are there property cycles?

The commercial property cycle is more dependent on general economic factors than the residential market.

How do I locate the right commercial property?

Work with a commercial property specialist because unless you are very experienced in commercial investment and have a substantial commercial property portfolio, it’s unlikely you will know what a tenant looks for in a good commercial or industrial property.

Am I ready for commercial property investment?

The investment strategy works particularly well for those with a solid asset base and in the cash flow stage of their lives. It may also make a great investment in your self managed super fund (SMSF) if you have substantial equity in the property. Being less familiar with commercial property than residential property - whether a house, unit or apartment – should not be reason enough to be uncomfortable about investing in it.

Sure, there are a lot of new terms to learn and unfamiliar practices, but there is a whole sector of experts who can help you along the path of rewarding commercial property investment.

Even being a first-time investor shouldn’t preclude you from investing in commercial or industrial property. The principles are similar to that of any property investment and the results can speak for themselves.