First-time buyers turn to commercial real estate for easier market entry

They are renting their home – some in a sharehouse – but have bought a commercial property.

Affordability constraints in residential housing are a driver, leaving younger buyers feeling “disenfranchised” about the possibility of owning a home, Palise says.

“In the last five years, if someone was living in Sydney, buying a $500,000 property was achievable to someone on a $100,000 salary,” he says. “Now that they’re looking at that same suburb being worth $1 million-plus.”

Palise is encountering buyers inspired by the FIRE (financial independence, retire early) movement who are seeking the passive income from commercial property to help achieve it.

“I don’t talk to clients anymore who want to climb the corporate ladder,” he says. “Ten years ago, when I started, lawyers would say, ‘I can’t wait to make partner.’ Now the conversations are, ‘How do I build a passive income so I don’t have to work 60 or 70 hours a week anymore?’”

An upside of commercial property is that many leases are configured so that the tenant pays council rates, insurance and maintenance, which reduces the landlord’s holding costs and boosts net income. In the residential market, these outgoings are paid by the landlord.

“Buying an investment residential property forces them to stay in the workforce because they’ve got an asset that costs them $25,000 a year to hold, whereas buying a commercial property that might be $20,000 a year cash-flow positive gives them that financial independence or freedom,” Palise says.

Colliers investment executive Jack McGregor says he has noticed a clear shift in who is active in the market, and this includes existing home owners acquiring their first commercial investment.

“It’s one of the more notable trends among young investors or first-time entrants,” he says. “In cities like Sydney, the entry level for housing now is so high that some buyers are exploring smaller-scale commercial assets rather than your typical residential investment.”

McGregor says the appeal is largely linked to stronger yields, which sit at 5 to 7 per cent in his market, coupled with leases that are substantially longer than average residential tenancies. Residential yields are commonly between 2 per cent and 4 per cent.

“Younger buyers are more informed these days, and they’re more commercially minded, so they’re thinking about cash flow, diversification, and return on capital rather than solely on capital growth over a long period of time,” McGregor says.

“Traditionally residential has been driven by capital growth – you buy, you hold, and you get that growth over long-term appreciation – but with today’s higher interest rate environment, tighter affordability and also the changes to capital gains tax, investors are becoming far more income-driven and commercially minded than before.” 

The federal budget has given investors reasons to reassess, McGregor adds.

“The budget reshapes how investors think about tax, income and asset classes,” he says. “The key advantage of commercial property is that the negative-gearing changes are only residential-specific, so that means commercial assets continue to offer tax benefits and greater flexibility.”

McGregor says a common misconception is that “commercial” means large office towers and complex developments.

Options include strata retail shops, small office suites, small-format industrial units and warehouses, and medical and allied health assets. “They’re really strong first purchases for investors because they have lower entry-points, firstly, but also you get consistent tenant demand and higher rental returns,” McGregor says.

Peter Costello, founder and managing director of the commercial advisory and land access firm Costello Group, says there is greater awareness and education today about investment strategies. He says commercial assets are now better understood and seen as accessible, not just for the wealthy or institutional funds.

“When everything stacks up, and all those things are assessed and understood, when you can lock in an 8 per cent or 9 per cent yield for three to five years, without having to do much, that’s a very welcome surprise,” Costello says. “We’ve got clients who are coming back and saying, ‘We bought this asset, we’ve now got significant capital growth there, and we’re able to buy again.’”

Lenders usually need a 30 per cent deposit, which is a major consideration for anyone with commercial property ambitions. Also important are the inducements required for some commercial tenants, such as office or retail fit-outs, which need to be factored into financial modelling, Costello says.

For this reason, he says simpler industrial spaces are a sensible choice for first-time investors.

“There is significant expenditure and money that has to be provided to tenants by way of an incentive, which doesn’t happen in residential,” Costello says. “Understanding those costs that are inherently baked into commercial property that may not appear at first glance is crucial.”

The market is diverse between states and asset classes, so Costello recommends that prospective buyers be clear on their goals. “Really have a look at what you’re trying to achieve,” he says. “Do you want to purchase a $1 million industrial strata-title asset where you’re not having to do too much, or do you want to take on a bit more risk?

“Understanding that future demand for the asset, in terms of who your tenant is going to be and what their business is going to be like in five to 10 years, is really important.