Investing in commercial property

Investing in commercial property

July 12, 2019

The options for commercial property purchase are pretty staggering. It's not just the type of property, use and location you need to factor, you also need to take into account that the risk, range, potential, flexibility and popularity are all vastly different for each asset as well.

It's easy to become overwhelmed and hesitant on making a commercial investment with so many property types to choose from.

What commercial property will you choose?

Retail shop
Car wash
Office building
Service station
Industrial warehouse
Fitness gym
Shopping centre
Mixed residential
Care facility
…just to name a few

To make sure you are buying the right property to meet your business goals make sure your sale contract is watertight by checking with a licenced, experienced conveyancer well before you make an offer.

To get you positioned to make initial enquires here is a market overview that summarises the three main commercial property sub-sections, retail, office and industrial.

1. Retail

Retail and hospitality venues typically both fall under Retail Property. It can be defined as premises where consumer goods and services are promoted and sold, so that makes the scope for retail investments big.

Shopping centres, gyms, service stations, stores, restaurants, entertainment and bars are just the start.

For retail investment, the number one priority is the location. Buying in the right location means higher than average rent, high-performance tenants and safe returns.

For investments, it's a popular choice due to the transparency of the business owner's performance. The main drawback with this type of investment is that the yield can be low compared to other property types. This is mainly because the popularity and the high number of interested investors keep the asking prices high. The income, while steady and predictable, rarely outperforms expectations.

Things to keep in mind with retail properties is maintenance and fit-out. Your high-performance tenant will want a glossy and modern facility. In most cases, fittings will be updated every 5 years or so to stay competitive. Who pays for this depends on the current lease agreement (if there is one) as well as how willing you are to attract and keep a certain tenant.

When crunching numbers on your predicted revenue, take into account vacancy periods, which may be long in times of economic downturn, as well as late rental payments.

2. Office

An office building is for professional service providers, it includes skyscrapers, suites, single tenants, multi-tenant and subdivisions. The level of sophistication varies greatly from building to building when it comes to accessibility, wellness aspects, security options, technology systems, fittings and amenities. These will affect not only the property's buying price but also the rental income and tenant type.

Typically the most state of the art buildings are new, located in the CBD and are part of a larger structure (like a skyscraper). They are the most expensive to buy and also the most expensive to rent. Older buildings, especially those in the outer suburbs may cost a lot less than the CBD to own, however, a significant amount of money will need to be invested in getting it up to a professional standard, which will probably never have you reaping the same returns as the CBD office types. One thing that may significantly raise the stakes is car parking. Parking is expensive as part of your initial purchase but often an essential part of the lease package.

Office buildings typically have long lease periods, which make them a good investment with strong capital growth. Compared to other commercial buildings, office tenants are likely to maintain the building and keep the fit-out to a high standard. Make sure any existing or new lease agreement has annual rental increases built-in or you may be caught out with a fixed lease term, limiting your income.

Things to keep in mind with office buildings is maintenance. High-class facilities normally require continuous property management to keep them looking impeccable. Maintenance costs can be high especially between tenants when air-conditioning, security and internet services, need to be perfect if you are looking to snag a great new tenant on a long lease.

3. Industrial

Industrial property is classed as any land or building used to store or manufacture goods or where machinery is used. It includes workshops, factories, research facilities, warehouses and distribution companies.

Because the workspace is set up specifically for the individual tenant, industrial leases are usually longer than retail and office buildings, since the tenant comes to rely on the set up to run their business. For the same reason, tenants are also likely to pay high rent for these buildings. The high yield makes industrial properties a favourable buy for investors, however, it's a purchase that needs a rainy day account as refitting, rebuilding or maintenance between tenants can be costly.

The biggest thing to keep in mind is versatility. A property that is so specialised it can only serve one purpose may stand vacant for a long time if the tenant doesn't renew the lease. Being able to repurpose or rezone an industrial building may be the one thing that saves a property owner should the economy change against them.  If an industrial building cannot be repurposed then you need to expect relatively low capital growth.

Because commercial property investment is more high-risk than residential property investments, always seek independent advice from a field expert who can help make sure the property you purchase will meet your overall financial and portfolio goals.


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