The benefits and risks of investing in commercial property

CommercialFriday 6 May 2016

If you mention the words ‘investment property’ in conversation, many people are likely to automatically think you are referring to residential homes. This is hardly surprising when you consider the amount of talk in the media about the price of houses and apartments, and the plethora of lifestyle TV shows about residential investments and improvements.

However, investing in commercial property is an option that can come with a number of advantages compared to residential. We have outlined these below, along with some of the risks that may also be involved.

Advantages of commercial property investments

  • – Higher rental returns – these can be as high as 7%-10%, or even more for industrial property. This compares favourably to residential returns which hover around 3%-5%.
  • – Industrial property in particular can provide very strong returns as mentioned above. According to Property Observer, returns can be as much as 10% – higher than retail and offices at around 8 – 9%.
  • – Longer leases. A quick glance at any homes-for-rent site will reveal that it is pretty unusual to have lease agreements that are longer than 12 months. However with commercial property the leases can be several years long – especially in cases where the lessee has invested capital into the fitout of the premises.
    Lessees of commercial property often have a higher vested interest in keeping the property in top condition – especially in cases where they have invested their own capital into the premises and also recognise the benefits to their business in keeping it well-maintained.

  • – Costs such as maintenance, rates, insurance and other outgoings are usually paid by the lessee.

  • Risks of commercial property investments
  • – Potential for longer vacancies, especially since rental agreements often involve a higher level of commitment. Also, during an economic downturn the risk of vacancy tends to increase, making commercial properties more subject to market conditions and variations.
  • – GST (Goods and Services Tax) applies for commercial properties, for both purchasing and rental income.
  • – Property values do not always increase. Residential homes – certainly in major towns are cities – are often considered ‘safe as houses’ in that their value tends to increase over time, even where the building becomes old and dated. However a commercial property can fall in value if it is no longer attractive to tenants.

  • Summary
  • While commercial property investment is not without risks there are some great rewards to be gained, especially for investors who are savvy and put effort into considering such aspects as location, local infrastructure and securing top tenants.

    It’s also important as a potential purchaser to be aware of the various stages of the property cycle – price growth, peaks, moderation and stagnation – so that you can buy at the right time depending on the outcomes you wish to achieve.

    In any case, making a time to speak to professional property consultants is important when considering purchasing commercial property to help ensure you get the best out of your real estate investment and to mitigate against the ever-changing risks involved.