Fundamentals of Commercial Property Investment
Investing in commercial property can provide diversity, increased yields, and cashflow to a property portfolio. Private investors have historically been deterred from the asset class due to high cost of entry compared to a residential investment. However, with the price escalation of the residential market and subsequent compression of yields, savvy investors are beginning to seek out the better yields on offer through commercial property. Below is a list of elements that an investor must consider for a strategic commercial investment.
Commercial lease – Lease terms can be much longer and more attractive than residential due to the quality of corporate tenants and their company backing. Leases may include mandatory annual increases which will ratchet the value of the property up over time. They can be more complex than a residential lease and therefore require specialist advice from a solicitor.
Commercial finance – Commercial lending is generally at lower loan-to-value ratio (LVR) than residential finance. This means the investor will need a larger deposit, usually 30-40% of the value of the property. Lease terms and length can also affect the banks appetite to lend on certain commercial property.
Markets – Capital city markets traditionally sell on lower yields due to low vacancy and risk. Regional markets can offer higher yields but also may be more volatile due to lack of economic fundamentals in these towns. Some of the larger regional centres offer a good mix of high yield and lower risk. It is important for the investor to target markets in line with their budget, risk profile and yield requirements.
Management – Another benefit of commercial property is that the tenant usually pays all outgoings such as council rates. This can result in much higher net yields than residential, where the owners have to pay expenses such as rates, insurance and management fees. These can reduce the yield and quickly erode the cashflow on the investment.
Property type – There are various types of commercial property such as warehouses, industrial complexes, office space, retail and restaurants. It is important to understand the macro and micro environment in which the property is located and make sure there is enough demand for the specific property type in the event the tenant vacates.
Professional team – As with any investment, it is important to have a team of advisors to help you source, secure and support the asset. This team can include a solicitor, accountant, buyer’s agent and mortgage broker. Transacting commercial property can be more detailed and involved than residential, such as reviewing a lease, so it will pay to have a solicitor with experience in this area rather than a conveyancer that may be more suited to a more straight forward residential purchase only.
The team at Sound Property combine detailed industry knowledge with a national network of commercial agents, advisors and other corporate contacts to help clients achieve strong returns with minimised risk. Whether you are looking for a single or multi-tenant premise, a building with add-value potential or a just a high yielding investment, Sound Property can assist securing your next commercial investment.