Top tips for budding commercial property investors
With the property market ever evolving, investors are beginning to shift their focus, with traditional residential buyers beginning to recognise the attractive underlying attributes that many commercial property investments offer.
For many, it’s the ‘set and forget’ nature of commercial properties, often leased to ASX-listed tenants on long, secure leases, that draws them in.
From extensive tenant fit-outs to tenants relying on a consistent location for their client base, a commercial property is typically occupied by the same business for three to five years – far longer than a residential investment.
“The benefits of owning well-leased commercial properties are attractive and include longer lease terms, better quality tenants and favourable lease provisions such a fixed annual rental increase,” Burgess Rawson’s Sydney director Simon Staddon explains.
“They also commonly offer net terms, where the tenants are responsible for the payment of all outgoings including statutory expenses and insurance and, most importantly, higher returns with yields typically between 4-8%.”
What has traditionally stopped private investors with modest budgets from investing in commercial real estate?
It primarily comes down to the perceived high cost of entry, the common lack of understanding around the sector’s fundamentals, and concern over losing a tenant.
But if you do your homework, those risks can be minimised with proactive management, Simon says.
Given the typical apartment price in Sydney is around $650,000 and the median house price more than $1 million, there are a host of commercial properties on offer at similar price points.
Burgess Rawson recently sold an entry-level investment at Sydney’s northern beaches on Narrabeen’s Pittwater Road. The strata property was leased to a popular café on a seven-year lease returning $31,000 net per annum, with the tenant paying annual fixed 3% rent increases and all outgoings including strata levies.
The property sold for $536,000, returning a yield 5.8% and making this a perfect commercial investment for first-timers.
Educate yourself on basic commercial lease terms
Becoming proficient in reading and understanding key commercial lease terms could be the difference between investing in a successful property or not.
Adjust your mindset
A ‘location specific mindset’ is often primary driver with residential investment but that’s not always the case for commercial properties. Key components to consider for commercial include the type of asset class – whether it be fast food, childcare or government-tenanted – the strength of the tenant profile and the lease terms in place.
Attend auctions to understand the market
When it comes to upskilling yourself in commercial property fundamentals, attending auctions allows you to gain a greater understanding of the market’s prices, yields, product quality, buyer interest and demographic.
Burgess Rawson’s Portfolio Auctions are hosted every six weeks in both Sydney and Melbourne and are a unique platform for this education process. There are a large variety of commercial investments on offer in diverse income brackets and geographical spread, which provides an instant snapshot of the market and the type of property you might like to invest in.
There is no such thing as a “one size fits all” yield
A commercial yield is all-encompassing and reflects the attributes specific to the property investment on offer, such as location, strength of tenant profile, length of lease, land size, development potential, vacancy factor and rent review structure.
Blue-chip investments garner increased interest and inevitably plenty of competition. Don’t hold back if this is the case and accept that other parties will also fight hard to secure it. Remember the reasons you like the investment are the same as why others do too.
Consider all locations
Quality properties are often limited in supply, so it’s important not to narrow your search. Widen the net and explore metropolitan, regional or interstate locations on their own merit. Regional properties also usually have the benefit of offering higher returns.