Lured by higher returns

Residential investors are being lured to commercial property by the promise of high returns, stability and rising opportunities.

Years of pandemic followed by months of rate rises have lured a flood of residential property investors into the commercial space for the first time.

Since 2020, commercial investors have been battling for essential service assets with long-term tenants. Warehouses, childcare centres, petrol stations, medical clinics and fast-food outlet are being targeted.

Amid stockmarket volatility and uncertainty in the housing market, investors once attracted to residential assets are now looking at commercial property.

PropTrack data shows that investors’ share of total housing purchases fell from about 15 per cent in late 2018 to just 5 per cent at the end of 2022.

Burgess Rawson’s commercial portfolio auctions are a litmus test of the market and its February sales cleared 29 out of 30 properties.

The firm’s chief executive officer Ingrid Filmer said there’s been “an absolute flight” of residential real estate investors moving into commercial since the start of the pandemic.

“They’re from all walks of life. I’ve got small business owners, tradies, immigrants – everyone,” Ms Filmer said.

“There’s a perception that commercial property is bought by rich people. That’s not the case.”

Commercial properties are more likely to be positively geared, they can make a better return, and their lease terms can provide a more predictable income stream, Ms Filmer said.

“Often the tenant of a residential property only has to sign a one-year lease and pay a onemonth bond,” she said.

“With commercial properties, the leases are up to five years, your tenant often pays the outgoings, and you can have a three- or six-month bond in case something goes wrong. It’s more of a set-and-forget investment.”

Knight Frank partner Michael Gilbert said the longer leases associated with commercial property, which often include fixed annual rent increases, were attracting lots of investors seeking stable assets.

“We are seeing many first-time commercial investors in the market,” he said.

“These are sometimes mum and dad investors, but at the moment we are seeing many buyers who are nearing retirement and looking for a stable income for when they stop working full time.”

But while you may have a commercial tenant for longer, they can also be harder to replace, Mr Gilbert cautioned.

Mr Gilbert said while rapidly rising rents are pushing up yields for residential investors, commercial property yields are still around double.