Commercial investing 101

While most investors appreciate the strength of property as an asset class, many head straight for residential property without considering the benefits of commercial property. For those who already have residential assets, knowing how to invest in commercial property, and how it differs from the residential sector, is vital when competing in Australia’s property market.

Understanding commercial property

The term ‘commercial property’ often refers specifically to office space, but it can be used to describe a range of commercial facilities including retail, industrial/warehouse space, hotels, car parks and mixed-use premises. These properties can vary in size from tiny shopfronts to office skyscrapers.

Many smaller to medium-sized properties are feasible investment options for experienced private investors, using either investment capital or a self-managed super fund (SMSF).

Before making a purchase, familiarise yourself with the responsibilities of a commercial property landlord according to the laws of your state or territory, as well as the profit and tax implications. These responsibilities may differ significantly from the obligations you’ve faced with residential assets so it’s vital that you understand the demands and requirements of commercial property.

Investment benefits

As an investor, you are probably keen to diversify your property portfolio in order to manage risk and returns. Commercial property not only enables this, but also has a number of distinctive benefits for investors:

• Higher yield: Commercial properties tend to generate higher yields than residential property, making them a good investment for generating positive cash flow.
• Reduced competition: With most property investors chasing residential property, commercial property is less competitive and therefore offers more potential to negotiate the purchase price.
• Long-term leases: Commercial leases tend to be long-term and often include an option for the tenant to extend the lease by the same length of time. Therefore, investors can enjoy guaranteed rental payments over a longer fixed term.
• Secure tenants: Businesses generally avoid regular relocations, due to the operational expense and productivity impacts, which means they tend to make very secure tenants.
• Lower maintenance costs: In contrast to residential tenants, commercial tenants are responsible for their property’s ongoing maintenance and fit-out. This boosts returns for investors, while enhancing the property’s value without increased capital expenditure.

Where to invest

Everyone needs a roof over their heads, which provides a degree of certainty with residential property. Commercial property, though, can be more cyclical, as growth in both the local and national economies influence business demand for new space.

As such, successful commercial property investment requires a high degree of research and forward planning. Consider the following as a starting point to gauge the level of current and future demand for commercial property in your area:

• What types of companies already operate in the area?
• What transport links are available?
• Is the area subject to any major infrastructure developments?
• Is there a shortage of a particular type of property in the area? If so, why?
• What is the unemployment rate for that area?
• What is the vacancy rate for that type of commercial property?
• How flexible is a particular property in terms of usage?

Most commercial estate agents can provide information on identifying commercial investment opportunities.

Every investment type is different, which is why portfolio diversification can be a wise decision. Always be sure to understand the workings of commercial property investment before you purchase your first commercial property.