Investing in Commercial Property - What You Should Know
The importance of research and analysis
Difference Between Residential and Commercial
Investing in commercial property is different to residential property. 'Commercial property' is a term that covers a range of property options including office and retail space, storage sheds, car parks and industrial properties such as warehouses and factories.
The key differences between commercial and residential property investment are:
- The tenants are referred to as the “lessee”
- Lease periods are generally for longer time frames i.e. 3,5 and even 10 years.
- There can often be longer periods of vacancy as it can be hard to find suitable tenants.
- Rent is generally reviewed annually and increased with CPI.
- Expenses such as rates and water are generally paid for by the lessee
- The lessee can change the property (i.e. paint or fit out) but is usually required to return the property to original condition at the end of the lease.
- GST applies to the purchase price, rent received and any expenses relating to the commercial property
- Banks will typically only lend up to 60-70% of the value of the commercial property
Research Research Research
Investors with sufficient capital (or those who are willing to borrow to invest), are typically able to invest in commercial real estate by buying a specific retail premises, office space, warehousing or industrial property.
Similar to residential property investment, commercial property investors should do their research and have clear buying guidelines before purchasing. Factors such as location and demographics, tenant quality and vacancy rates, the rental return (also referred to as yield) and likely future capital expenditure are some key things to research prior to investing.
Whilst individuals, partnerships, companies, trusts and self-managed super funds can invest in commercial property, when borrowing to purchase a property most banks will generally require a larger deposit of around 30%.
As a general rule of thumb, it is typically riskier to invest in a single asset, as opposed to a number of assets. The same goes with property investment in that it can be more risky to invest in a single property as opposed to a portfolio of commercial properties. The benefits of diversification will help to spread the investment (and risk) both geographically and within industry sectors such as retail, industrial and office property investments.
Australian Real Estate Investment Trust
As an alternative to direct commercial property investment, and to achieve diversification in property, investors have typically turned to Australian Real Estate Investment Trust (A-REITs), property syndicates or managed funds.
A-REITs, previously called Listed Property Trusts (LPTs) are investment trusts, which provide investors with unitised holdings in a professionally managed portfolio of commercial properties located both locally and internationally. A-REITs are listed on the Australian Stock Exchange (ASX) and offer investors the benefit of investment in property, but with liquidity, (option to sell) and the opportunity to invest in a range of properties that are typically unavailable to smaller investors.
Prior to investing in A-REITS, careful consideration of a number of factors should be made including; whether the fund has provided consistent returns, the reputation of the property management, types of properties in the portfolio, liquidity offered, level of gearing or borrowing in the fund, the nature of distributions and whether there are franking credits and/or tax deferment. Because the A-REITs are listed investments, the unit price can be more volatile.
Property Syndicates were particularly popular in the 1980s and 1990s, however since the Global Financial Crisis (GFC), factors such as lower yields, higher interest rates and uncertainty of property values has seen demand and popularity of these investments decline.
A property syndicate is a direct property investment, which is managed and marketed by a licensed property dealer. When investing in a property syndicate you should receive a Product Disclosure Statement (PDS), which has been lodged with ASIC.
Investing in commercial property can be an attractive option for many investers, however it is imperative that sufficient research and analysis is conducted to determine suitability for your own situation, risk profile, goals and objectives. And if in doubt, always seek professional advice.