When a popular café in inner-city Melbourne hotspot St Kilda sold at auction recently, it made for some compelling contrasts for investors. The sale served to highlight a rapidly diverging set of investment conditions facing property buyers in the current market.
Hugs N Mugs Cafe on St Kilda Road, VIC, sold in March 2023 for $660,000 on a yield of 5%.
The sale served to highlight a rapidly diverging set of investment conditions facing property buyers in the current market.
With the median house price in St Kilda now topping more than $1.5 million, investment yields of 5% or more are all but a long-distant memory.
Yet here was a property in one of Melbourne’s most in-demand suburbs, costing just $660,000 and returning $33,000 in rent annually – promising to deliver a yield of 5% every year for the next 10 years, courtesy of a brand new lease.
It’s a stark contrast that one of the industry’s most respected commercial advisors, Burgess Rawson CEO Ingrid Filmer, says highlights the growing disparity between the value in the two markets.
“The Australian dream of home ownership is as strong as it ever was, however as an investment portfolio goes, residential property pales in comparison to the commercial sector,” Ms Filmer says.
“There seems to be a widespread misconception that commercial property investment is for the ultra-wealthy, or those with a technical understanding of a particular commercial sector, which couldn’t be further from the truth.
“Some of the best-performing assets sit within the $500,000 and $1 million bracket, where a good quality investment can return $30,000-60,000 per annum.
“These price points are ideal for investors seeking an alternative to the overheated residential market.”
Priceline Pharmacy in Horsham, VIC sold in February 2023 for $1,006,000 on a yield of 5.69%.
As the median house price in Australia creeps ever closer to $1 million, and have long surpassed it in some capital cities, Filmer says commercial investments remain eminently accessible.
And unlike residential property, where cheaper usually means compromising on location, demand and amenity, Filmer says commercial assets at accessible price points are often underpinned by renowned national brands in ‘essential service’ categories.
“Recently we’ve sold investments leased to Priceline, Liquorland, Woolworths (PFD), Daniel’s Donuts, Australia Post, and Bendigo Bank, all for $1 million or less,” she says.
“Essential service assets are those that are able to operate at all times, and typically demonstrate a high level of resilience to market cycles, such as childcare centres, medical centres and fuel stations,” she said.
Commercial vs Residential comparison
 Commercial |
 Residential |
|---|---|
 Long-term lease security, with leases extending up to 20+ years |
 Year-to-year rental agreements |
|
‘Set and forget’ lease structures, with tenants responsible for outgoings including maintenance and repairs |
Landlords responsible for repairs and maintenance |
|
‘Essential service’ tenants ensuring strong financial performance and longevity |
Tenant unpredictability |
|
Significant yields, often between 5-12% |
Lower yields, traditionally 2-3% |
“These properties generally enjoy long-term lease arrangements of between five to 10 years, often to household names, and the tenants are responsible for all outgoings, repairs and improvements.”
Underlining the growing popularity of commercial investments, more than 5000 potential buyers will descend on Burgess Rawson’s Portfolio Auction events, held in Melbourne, Sydney and Brisbane every six weeks.
Ms Filmer says simply observing these commercial sales events – either in-person or online – can be a great starting point for anyone considering switching their investment strategy to commercial.
“My tips are to start small, stick with resilient asset classes, and observe the auctions,” she says.
“As with all investments, it’s important to first get the right financial advice and consider what’s best for you and your own personal circumstances.”
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