Have you thought about investing in commercial real estate?

When it comes to property investment there is a lot of focus on residential property, but the commercial market can offer some excellent opportunities for investors.

REIWA’s Commercial Network Committee discusses the options for investors, the pros and cons of commercial investing and offers advice for people looking to make the move to the commercial market.

What are the benefits of investing in commercial real estate?

Generally, the yields are higher than residential investment. While the residential investment market is booming at the moment, residential yields usually sit around 3 - 4 per cent and commercial yields can comfortably reach 7 per cent, which almost double the residential yield. Returns are usually much better for commercial investors.

Another benefit for commercial investors is the tenant pays a lot of the costs, or outgoings. These include fitting out the premises, maintenance, council and water rates, strata fees and insurance.

Commercial leases are also longer than residential leases. Typically, residential leases run for 12 months, in the commercial market they’re usually for five to 10 years. It’s not unusual to have a 15-year lease.

What are the risks?

The higher the yield, the higher the risk.

You are at greater financial risk due to longer periods of vacancy in the commercial market compared to the residential market. If a commercial tenant leaves, you could find your property is vacant for months, potentially a couple of years. You need to be able to weather that.

For example, if you’ve bought a strata office, your property could be vacant for six to 12 months, as distinct from the couple of weeks we are currently seeing in the residential market.

Like residential investing it is important to get a good tenant. A good tenant lowers your risk and also makes it easier to sell your property. Interestingly it can be harder to sell the property if a lease is coming to an end. Banks and valuers tend to see this as lowering the property’s value, which may make it harder for a potential buyer to get finance.

What sort of properties can you invest in?

The commercial market is generally divided into the industrial, retail and commercial/office sectors.

Industrial may include factories, warehouses and large buildings used as distribution, manufacturing, assembly, production and storage centres.

Retail can include shops in strip malls or in shopping complexes. These shops can be used to sell goods, like clothes and furniture, or services like fast food, restaurants and hairdressing.

Commercial/office could include large or small office buildings, or individual offices in strata complexes.

You could get started with as little as $400,000 to $500,000 for a strata office or industrial unit. Generally, in the Committee’s experience, ‘mum and dad’ investors spend between $400,000 to $5 million.

How do you get started?

Most people move into commercial investing after owning residential investments, it’s the next step in diversifying their investments.

If you are considering investing in the commercial market, it is essential to do your research. 

For example, each of the commercial sectors is performing differently, and even within each sector some areas are performing better than others. For example, retail within the Bunbury CBD is challenged, yet retail is doing well in the developing suburbs around Bunbury. Industrial is performing very well. In the office market, the CBD vacancy rates are fairly stable, but in the suburbs and regions there is a shortage of office stock and vacancies fill quickly.

You will also need to get good advice. You need a good agent, financial advisor and accountant. Make sure you ask a lot of questions and understand the implications of commercial investment on your situation.

Be aware that commercial investing generally requires a greater financial input from the buyer. Typically banks like a 20 per cent deposit for residential investors. In the commercial market the deposit requirement can be 30 – 40 per cent.