Investing in Commercial Real Estate

By Aldo Galante October 29, 2018

High Returns on Investment

Commercial real estate investment has become an important vehicle to build wealth portfolios. There are many advantages in choosing to invest in the commercial real estate market. Returns on residential property investment in Australian capital cities is currently at around 2%, whilst the commercial real estate market is currently typically yielding between 5% to 6%.

Commercial Real Estate Investing

Advantages of Investing in the Commercial Real Estate Market

One of the most compelling reasons to invest in commercial property is the longevity of commercial leases. Unlike residential properties, commercial tenants rarely enter into a Lease with a view to moving on in 12 months time. Most commercial Leases are on initial terms of 3 to 5 years and usually include an Option to extend for a further term.

Commercial tenants also typically improve the look of a commercial premises as it is their place of business. They want to create a certain feel, whether it be professional, brand-specific to a certain industry, or to be centrally located for their existing and potential clients. This investment in the space speaks to the eagerness to retain tenancy.

Another benefit is that under most commercial lease agreements, the rates and outgoings are typically paid by the tenant, rather than the property owner.

How Demographics Affect Commercial Property

Demographic mapping shows how a segment of the community can create the need for new infrastructure. For example, if you think of baby boomers making their “sea change”, it is only natural that increased health and aging services need to be provided in these coastal areas.

Evidence shows once people are settled with career and family, they have a greater desire for a quality lifestyle, including working closer to home. This drives an increase in demand for small offices within the suburban setting, with one such suburb enjoying this surge in Moonee Valley.

Population Growth

Another indicator of potential commercial investment is population growth. As new suburbs emerge, the demand for day to day services increases. This includes shopping centres, strip shops, eateries, support services and office space. This in turn creates the need for closer warehousing and industrial space.

Commercial Real Estate Management

Investing in Warehouse Space

An industrial property, such as a factory or warehouse, is often a good choice for first time commercial investors and can usually be quite straightforward to manage. The entry price can be affordable (you can invest for under $500,000) and you can typically expect yields of around 5.5% - 6.5%. Warehouse space in emerging suburbs is often a good choice.

Make sure your industrial investment has ease of access, ideally near freeway ramps is on flat ground, has high clearance entrances for truck accessibility, includes 3 phase power and the layout is largely high clearance and open plan for flexibility. A generous concrete hardstand area is also very attractive to incoming tenants.

Investing in Office Space

Office investments are currently typically yielding 5%-6% with opportunities to enter the market starting under $500,000 for a small strata office space (read more here: https://commercial-real-estate-news.gormankelly.com.au/have-you-considered-a-strata-commercial-investmentand exceeding well into the multi million dollar bracket for large multistorey buildings.

Ideally look for well placed offices in established and desirable suburbs with high quality tenants. Floor plates should be open plan for flexible fit out with plenty of natural light and appropriate car parking allocation. Energy efficiency and unique/ “funky” designs are also becoming increasingly important to incoming tenants. An office landlord needs to be open to providing refurbishment and upgrades where required.

Investing in Retail Space

In the current economic environment, Retail can be a more complex and sensitive commercial investment option which is typically better suited to more experienced investors. A good retail investment will rarely sell for under $1 million. Yields can be as low as 2% in high demand areas, but typically sit around 3.5% - 4.5%. Location, exposure, accessibility, car parking, residential catchments and local amenity are all very important factors when considering where and what to buy.

It is critical the right tenant is matched to the premises for security of a Retail Lease. Retail landlords often face vacancy risks during tenant turnover and can suffer loss when an unsuccessful retail tenant fails to hit the anticipated mark. However, a savvy retail investment will provide excellent returns.

Commercial Property Market Trends

Commercial Property Management

A well-researched commercial property investment can be very lucrative, however good management is key. It is crucial that the most suitable tenant is matched with the property and conversely, the right investor is partnered with the right property.

This is where you need a commercial property management specialist.

GormanKelly is an industry leader in commercial property management. Effective commercial leasing is not just about getting a property tenanted, it is about working with the right tenant who will not only enhance and maintain the space but create the best long-term leasing outcomes for both parties. This will minimise vacancy time and give the investor peace of mind knowing that the professionals are working hard to make commercial investing as seamless as possible and maintain cash flow for longer periods.

If you want to learn more about Commercial Property investing, contact us today on 03 9810 7200.

 

This communication is produced for your general information and awareness purposes only. GormanKelly takes no responsibility nor liability for the accuracy of the contents herein. The contents of this email do not constitute legal nor financial advice, are not intended to be a substitute for legal nor financial advice and should not be relied upon as such.

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Aldo Galante

Written by Aldo Galante

For over 30 years, Aldo has been at the forefront of Australia’s fast-evolving property industry. He served as President of the prestigious Australian Property Institute (Vic), providing determinations on rent-reviews and valuations

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