Residential property investment is a bit of a national pastime for Australians – more than two million Australians own at least one investment property. In fact, CoreLogic estimates, the overall value of residential real estate across Australia to be $6.5 trillion across 9.6 million dwellings. As an asset class, housing is now worth more than three times the value of superannuation funds across the country ($2.0 trillion) and more than four times the value of Australian listed stocks ($1.5 trillion). It is further estimated that investors own 27% of Australian dwelling stock by number and 24% by value, while about 47% of the value of new mortgage originations are for residential investments which provide the vast majority of rental housing across Australia.
That is an enormous amount of investment capital and economic activity, driven largely by Mum and Dad investors. But many residential property are tentative about commercial real estate investment and feel that it is outside their capacity to participate in the sector.
However, the reality is that a savvy commercial real estate investment is within the reach of many residential investors.
Commercial real estate has many benefits – portfolio diversification, tax effective ownership structures, depreciation advantages, locked in annual rent increases, tenants pay outgoings and diverse price points. There are also some challenges – finance terms tend to be stricter, there are usually larger gaps between tenancies, there is greater exposure to economic cycles, repairs and maintenance can be expensive and commercial properties are harder to sell.
If you think you might be in the market for a commercial real estate investment, there are some key nuances that you should have your head around.
- The tenant
The quality and commercial viability of your tenant is critical. Ultimately you want a tenant that is well matched with the property with respect to location, is operating in a strong sector with good long term prospects and is performing well. Acquiring a property with an existing tenant is also desirable.
- The lease
Commercial leases are generally longer than residential leases and actually underpin the value of the property. Ensuring the lease conditions are right and taking strong expert and legal advice is critical to getting the most out of your commercial investment.
- Economic conditions
Commercial tenants are more exposed to economic and trade volatility. Demand for products and services can be fickle and matching your property with the right sectors is critical.
Location affects value and it affects the type of property you are looking for. Taking a broader view of location also provides a much wider range of price points to consider for similar types of property.
- Planning and infrastructure
Local and state government planning and regulation, potential infrastructure developments and location of supportive infrastructure are all important. Consider, for example, the impact on both tenants and building owners from developments such as Sydney’s light rail project, which has seen numerous businesses close down while construction was ongoing.
- The property
The property you invest in needs to be suited to the businesses you are hoping to attract, needs to be in good basic condition and needs to be at a comparable price point to the market.