Article updated 2 September 2021.
While residential property investment is often a well-travelled road to financial security, savvy investors are increasingly looking to invest in commercial property. So, what’s the attraction?
Commercial real estate provides a tempting scenario for those prepared to explore the sector and take advantage of its benefits.
Higher yields, lower management fees
As residential rental yields continue to fall across our major capital cities, the higher yields achievable through commercial property are appealing to many investors. Residential property yields tend to hover around three to four per cent, while commercial properties can yield up to 10 per cent.
Take this example; a commercial property such as an inner city strata office with a purchase price of $350,000 may lease for around $25,000 per annum, delivering a 7.25 per cent yield. This is considerably higher than you’d expect to achieve on a residential unit purchased for the same price.
Meanwhile, management fees for commercial properties also tend to be lower, averaging around three to five per cent versus around seven per cent for residential properties.
The commercial real estate category includes warehouses, industrial properties, farmland, retail and more. Although the capital gain tends to be lower on commercial real estate (due to the generally lower land component), the higher rental income can generate the cash flow you need to help you maintain the other investments in your portfolio.
The security of long leases
Commercial property leases tend to be long – usually three, five or even 10 years – with rents reviewed annually. This compares favourably to residential properties, where leases tend to be a maximum of 12 months. The flip side is that commercial properties can be more difficult to lease and may experience longer periods of vacancy than residential properties.
Experienced commercial property investors look to minimise the risks and costs of extended vacancy by purchasing multi-lease properties such as shopping centres or strata-titled offices. With a multi-lease property, you will continue to collect rental income even if one tenant vacates. Another strategy is to select commercial properties with government or large corporate tenants who tend to be very stable and will generally renew their leases over the long term.
Low outgoings, tenant-funded improvements
Maintenance and other costs such as outgoings and insurances are generally paid for by the lessee, which means returns on commercial real estate tend to be higher than for residential properties where the landlord is required to pay for the property’s upkeep.
In addition, commercial tenants often invest in fit-outs or other improvements that enhance their business, improving your investment at the same time. The other benefit of this is that once a commercial tenant has invested in improving the building and customising it to their needs, it’s less likely they will vacate the property, creating a win-win situation for both landlord and lessee.
Aren’t commercial properties expensive?
Commercial real estate can be very affordable. A quick search around CommercialRealEstate’s commercial property listings reveals commercial properties for sale in virtually every price bracket. However, check with your lender as some banks require a larger deposit for commercial property purchases.
Like all property investment, success with commercial real estate depends on sound research, but for those willing to take the plunge, the rewards can be enormous.