According to the report, over the last ten years, residential property has produced average annualised returns of 8.8% compared to 4.5% from shares.
This win is a fabulous result for bricks and mortar. However, the Russell report overlooked the returns investors are enjoying from direct investments in commercial property. In fact, depending on the location and asset type, whether it’s a retail, industrial or office investment, owners could be enjoying yields ranging from 6 -15%, as well as some capital growth.
To my way of thinking, owning a commercial property, whether it’s an industrial unit, retail shop or office space is a fantastic way to diversify your investment portfolio, create some tax benefits and build long-term wealth.
Owning a commercial property is a natural stepping stone from residential property. However, there are some significant differences between these two favourite asset classes. For starters, leases tend to be longer and can range from 5-15 years, as it’s just uneconomic for your local Harvey Norman to move every six months when its lease is up. Moreover, commercial leases tend to be secured by a personal or bank guarantee. On the flipside, when a lessee vacates it can take longer to find a new business to occupy the property.
Another point of difference with a commercial investment is that the lessee pays for and contributes to most outgoings such as maintenance, cleaning, and utilities. With a residential investment, these costs usually fall to the landlord.
We mentioned it’s important not be mindful of extended vacancy rates when investing in commercial property. Likewise, when you start searching for a commercial property, you might find that per metre prices/values are a little higher than residential, but not always. Also, your lender might ask for a more significant deposit, and as much as 30-50% of the value of the property, while there will be ongoing building and upgrading costs. Moreover, when the time arrives to sell, expect longer selling times, as commercial assets are not as liquid as residential investments.
That said, all these factors can be smoothed over if you take the time to do plenty of research, seek advice from experts such as your local Raine & Horne Commercial agent, and understand the pros and cons of diversifying into a commercial asset.
No matter if you’re a commercial property greenhorn or an experienced investor, always consider the location of the property and the demographics of the area carefully. For example, a property tenanted by a childcare centre may not be as successful in a suburb or town dominated by baby boomers.
Likewise, consider the vacancy risk carefully, and this involves examining the lease terms for the current lessee, and whether there is an option to renew.
Leverage is another important consideration when buying a commercial property asset. For example, it could be riskier purchasing a property with a single lessee rather than a building with multiple lessees. Moreover, it’s important to consider the financial strength of the lessee as part of your due diligence.
Finally, a winning commercial asset is not a sit and forget investment. It requires you to persistently look for ways to maximise its potential, with the help of an expert asset manager such as Raine & Horne Commercial. It is vital you obtain advice and seek the help of your agent and property manager to guide you through the process of buying a commercial asset and then maximizing its potential whether it’s through a development or a refurbishment.