Investing in Commercial Real Estate - Retail Properties

By Manny Galanos November 08, 2017

There has been plenty of focus on the performance of retail in the media of late, with varying outlooks ranging from doom and gloom to sunny promise. There is no denying the economic circumstances globally are pretty grim with no quick solution apparent.

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So, does retail property still make a sound investment in suburban Melbourne?

RETAIL RETURNS

Back in 2010 we saw investors clamouring to purchase in popular retail strips on yields as low as 2%. Today, you can expect a more respectable return of circa 4-5% (depending on location, lease terms etc), ideally with a short to medium term upside. With the availability of non-recourse debt and arbitrage on low interest rates, the conditions for buying are the best in years.

WHAT TO LOOK FOR

Typically strong performing retail strips have access to plenty of car parking and/ or are underpinned by great access to rail. Alternatively, the development of medium density residential apartments with ground floor retail can reduce this need and assist to enhance the vibrancy of our retail strips as the community that lives within the strip supports it.

To ensure sound investment, make sure the rental is in line with true market levels. Inflated rents are unsustainable and could mean, in some instances, a dramatic reduction in return upon any impending market review.

It is also important to ensure the Lease allows for appropriate security and/ or guarantees, just in case the tenant does default.

COMMERCIAL IS COMPLEX

When setting your budget, you need to consider the implications of Stamp Duty and GST.

When you buy Victorian commercial property you are liable to pay duty. The duty payable is based on the market value of the property or the GST inclusive purchase price, whichever is greater. To obtain current duty rates visit the website of the Victorian State Revenue Office.

GST may be payable on the sale price depending on a number of factors including whether the property is sold vacant or as a going concern, whether the vendor and/or purchaser are registered for GST and what the contract of sale specifies. Check the relevant legislation and ensure that the terms of the Contract of Sale are clear with respect to the application of GST to the sale price and who will pay any GST, if applicable.

COMPARABLE RECENT SALES/ LEASING EVIDENCE

Buying commercial property is complex, you can’t be a generalist. Each suburb and retail strip within it performs differently to the next. For example Bridge Road, Richmond has been heavily hit by vacancies yet Swan Street, Richmond is doing very well.

The drivers are different, so seek local expert advice for peace of mind. We have been helping investors in Melbourne for 24 years and this has equipped us with greater knowledge of different commercial property types. If you are thinking of investing on commercial real estate, or specificaly, retail properties, please click here and take a look at commercial properties we currently have for sale. 

 

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Manny Galanos

Written by Manny Galanos

Manny is a fully Licensed Estate Agent and Auctioneer with a Bachelor of Economics from Monash University. He is also an Associate of the Australian Property Institute.

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