Blue chip commercial vs residential – comparing investments in today’s market
OPINION: Who wouldn’t want a secure investment leased to a publicly listed tenant on a long secure lease, right?
With so much competition in the residential investment market, there are a growing number of traditional residential investors who are attracted to the strong underlying real estate attributes, and superior lease covenants on offer in commercial property investment.
Obviously, the benefits of owning well leased commercial property investments are clear: long secure leases, high quality tenants, quite often attractive landlord lease provisions including fixed annual rental increases, and net terms – where the tenants are responsible for the payment of outgoings, and comparatively higher returns, sometimes 5% net or higher.
Now compare this with residential investment. Instead of net lease terms the yields are typically under 4% gross. That means the net return is even lower once you take into account costs like body corporate fees and council rates for example.
Then there is the quality of the tenant. Put simply private tenants are going to be less secure generally than national or global companies who are often intrinsically linked to the properties they occupy by virtue of the continuity of their growing customer base attending their location over time.
So then, what has traditionally stopped private investors with modest budgets from investing in commercial real estate?
This mostly has to do with the perceived high cost of entry into this class of investment.
Given the typical apartment price in Sydney might be say, $700,000 and house prices around $1.1 million, most people don’t realise that there are commercial investment properties on offer at similar price points.
In recent times this has begun to shift with more and more buyers becoming frustrated by the lack of value in the residential market and have started to embrace commercial property investment.
The samples of some strong regional investment properties that have sold in recent times as an example. ANZ, Narrabri for $880,000, 6.53% net return; Liquorland, Mount Sheridan (Cairns) for $620,000, 5.95% net return; and Millers fashion retail for $970,000, 5.55% net return.
A similar opportunity on the market right now is Dominos in Northam, Western Australia where price feedback has been under $500,000 with fixed increases and net terms on offer.
There are significant opportunities for those investors looking to place larger sums of capital too, with some properties boasting annual incomes of up to around $1 million dollars also included in the portfolio.
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