Commercial property is a natural investment “stepping stone” from residential property and a great way to diversify your portfolio, create tax benefits and build wealth.
It’s a more sophisticated form of investing. However like any asset class, there are risks. So aspiring investors should take the time to do plenty of research, seek advice from experts and understand the pros and cons.
Successful commercial property investment requires an understanding of the complex market factors at work, unique financing requirements, property management options, leasing arrangements and a good grasp of the potential risks.
An understanding of these factors will provide a reliable basis for the selection of commercial investment properties that will succeed, being either retail, industrial or office.
The following considerations apply equally to large and small commercial property and will help to identify suitable locations and opportunities for investment.
Understand the commercial property market drivers
The fundamental driver for commercial property growth is similar to the residential market – it’s demand. However, commercial demand is driven by economic factors as well as population growth.
A strong economy is fundamental for any successful commercial property investment. Booming commercial markets are supported by strong international, national and local economies.
As the economy starts to grow, transport companies experience the first signs of growth, driven by the increased demand for materials used in the manufacture of goods for sale, an increase in imported goods and/or an increase in building. Transport stocks begin to rise on the back of increased business and earnings, more jobs become available, and the demand for office space increases.
As the economy continues to grow, the demand will start for warehouse space, then retail, followed by office.
Other factors that influence commercial property demand are:
- Interest rates
- Infrastructure development
- Population growth
- Retail spending
- Understand the risks
Risks to be aware of :
- Lease terms
Long-term leases of 3–5 years or more can have advantages, but it takes longer to find a tenant if the property becomes vacant. Prolonged periods of vacancy are common and an investor will need to be able to handle the carrying costs during this period.
- Size of commercial property
Larger commercial properties can be harder to lease than small suites and will cost a lot more to hold.
Changes in supply conditions can create potential problems. An increase in new property coming onto the market in the same area creates a threat to existing tenancies as tenants may look to upgrade or expand. Strong supply can also reduce potential yields.
- Changes in infrastructure
Major infrastructure implementations or changes have both a beneficial and negative effect on commercial property returns. While infrastructure can attract commercial investment to an area, it has the negative effect of drawing tenants from existing areas. Keep in mind that areas close to CBDs are always popular. However, new growth areas further away tend to have more pronounced cycles.
Individuals, companies, syndicates of investors and trusts can purchase commercial properties. For individuals or groups of less than five, an ideal structure to use is a Self Managed Super Fund (SMSF), so long as no mortgage is required, ie, the fund can purchase a property outright. An SMSF can also provide investors with tax benefits.
Commercial property finance is often more complex than normal residential funding. Some financiers specialise in commercial property finance because of the complexity of some situations.
Normally banks will lend up to 70% of the value of the property but this value is often based on the rent/yields achieved by the property.
The management of commercial property is usually undertaken by commercial agents who operate more like ‘dealmakers’ than traditional residential agents.
The agent will try to match the property with an appropriate business and can lure businesses by arranging attractive deals, like rent-free periods, free fit-outs and the like.
The details in the lease can make or break a commercial investment.
- Leases can be three, five or even 10 years with an option to renew.
- Rental increases linked to CPI.
- The tenant pays all outgoings. This includes rates, water, body corporate fees, etc.
- The tenant makes good any physical changes (often the tenant will be allowed to install partitions etc, however, the owner reserves the right to have the office, shop or warehouse restored to its original condition). This enables the owner to rent to a suitable tenant when the existing tenant leaves.
- Some types of tenancies may require special council approval, for example chemical treatment facilities (such as those used by an electroplater), medical centres, childcare centres and so on.
Leases over a certain value are registered with the Department of Lands (NSW) or equivalent in each state.
Introducing our speaker – Graham Rogers – Commercial sales and leasing Lin Andrews Real Estate
Graham Rogers wasn’t always investing and selling and leasing Commercial Real Estate. He started life in the IT industry setting up the first in house computer system for Gerard Industries and other well known companies, before taking on general management and operational management roles in various companies, including manufacturing companies. With a good understanding of warehouses, factories and offices he made the move to selling and leasing commercial properties.
For more than 20 years Graham has sold and leased commercial properties from Gawler to Lonsdale, along with having invested in his own properties along the way. There isn’t much he doesn’t know about commercial property. He will provide an insight into commercial real estate and some experiences along the way.
Topics will include
- Differences between Commercial and Residential investment
- Types of commercial – retail, office, industrial, hospitals, aged care, Motels
- Valuations and the lease – how are they related?
- Stamp Duty and land Tax
- Leasing and selling commercial properties
- Understanding Contamination.
- And more
You are welcome to bring along friends or relatives who are interested in property investing – it is all about networking with like-minded people!