'Not the usual people you’d expect': Meet the new investors setting their sights on commercial property

Many mum and dad investors, others looking for places to park super funds, and even developers, fed up with the price of sites and low yields, are now crossing over from residential to commercial properties, lured by the promise of greater returns.

“We’re now running at about four times our normal volume of investors since COVID-19 hit,” says Scott O’Neill, director of commercial property buyers’ agency Rethink Investing.

“It’s now not the usual people you’d expect investing in commercial.

“It’s really gaining in popularity and, with a lot of residential properties now delivering record low yields, it doesn’t make sense to pay out such big prices for so little return. And if you research what and where to buy and do your due diligence, there are now lots of opportunities.”

Gross rental yields on houses in Sydney, for instance, are now just 2.9 per cent, in Melbourne 3.09 per cent and Brisbane 4.58 per cent on the latest Domain Group figures.

Most commercial yields, however, tend to be higher and are net returns with the tenant paying most, if not all, outgoings, including land tax, rates and insurance costs.

“The returns are significantly higher than with residential at the moment,” says property valuer and investment adviser Anna Porter, the founder of Suburbanite.

“As it’s a net yield too, returns can often be double.

“Of course, capital growth can be more modest, which might be the trade-off. The capital growth in commercial tends to be tied to rental returns, and sometimes it can be slower for that profile to increase.”

But growth can always be engineered to some extent.

Just as a renovation to a house or unit can add value, a commercial property can be adapted to create multi-tenancies, a change of use, the sale of signage rights, or by adding communication towers to a rooftop.

As with every property bought, it’s important to check out the location, the tenancy, the type of business, demographic trends locally and the likely future of an industry.

Bricks-and-mortar retail generally isn’t doing too well, but many supermarkets and neighbourhood shopping centres are going gangbusters during the pandemic.

Similarly, pharmacies, medical centres and fast-food outlets all seem to be COVID-resilient and, while a number of retail businesses are failing through current lockdowns and uncertainty, even they may present opportunities.

“There’s a lot of commercial property now for sale that’s untenanted,” says Brendan Dixon, the managing director of lender Pure Finance.

“Banks tend not to like lending on that, but if an investor is in a sound financial position, they can take advantage and pick up real bargains.”

The investment profile of office stock tends to depend on its location and size, but industrial spaces are delivering huge returns.

“Industrial is undergoing a huge amount of growth, with sometimes double-digit returns,” says O’Neill.

“The logistics boom off internet shopping means more storage is needed, and there’s not enough new space being built.”

Commercial tenancies also tend to be much longer-term than residential, and prices to get into the market can vary hugely.

“You can still pick up a piece of commercial real estate in a decent metro area under $200,000, like a shop in Perth or a warehouse in Adelaide,” says Porter.

“It can be a much smaller outlay than with residential – or much bigger.”

This article originally appeared on domain.com.au.