What do Donald Bren, Wang Jianlin, and Joseph Lau have in common?
They all made Forbes World’s Billionaires list in 2018, and they made their fortune investing in property. Whether inspired by the idea of unlimited wealth or reassured by the solid bricks and mortar style investment, thousands of Aussies are following their lead. Real estate is not only Australia’s favourite investment strategy, but it is also one of its biggest industries, contributing over $200 billion to the economy last year and accounting for 13% of GDP.
However, when most people consider purchasing real estate, their thoughts immediately turn to townhouses, apartments and standalone homes. The assumption for most is that investing in the commercial real estate market is out of their budget. The truth is that there are numerous pathways into this highly lucrative market that are equally as affordable as the residential space, if not more so. So why should you be considering commercial property as the next addition to your investment portfolio? Let’s take a closer look and find out.
An ideal investment property has a permanent metaphorical “no vacancy” sign up. A low vacancy rate is crucial to maximising the return on your investment and not leaving significant revenue on the table. Commercial property leases tend to be three to five years, compared to a standard six to twelve-month residential contract. Furthermore, turnover rates a mere fraction of home rentals. All this adds up to relatively stable, long-term relationships with tenants with less stress and hassle and substantial cost of looking for new occupants on a regular basis.
The biggest fear of any landlord is that the tenants trash the place. The best insurance in the world won’t make up for the time and inconvenience caused by having to repair extensive damage caused by a bad tenant. Commercial tenants are running a business from the premises, so they have a deep, vested interest in ensuring that their space is well-kept and presentable at all times. Just as you want to project the most professional image to your business counterparts and create a positive first impression, your tenants will feel the same way about their rented office space.
With any investment, your main priority is securing a strong return. The best way to assess a property’s potential is to consider its rental yield. This measures the amount of income the property will make as a percentage of its total worth. It is challenging to compare like for like as residential property expenses can vary greatly depending on their location. Variable factors such as whether body corporate fees are applicable and the amount of upkeep required will all have a significant impact in this regard. However, statistics show that commercial properties usually generate a net yield of 5-10% (after costs), compared to 3-4% gross yield (before costs) from residential properties. That is a pretty compelling picture for any enterprising investor.
Yearly rent reviews are also standard for commercial property, often being written into the contract. It is industry standard practice to increase the rent in line with CPI, and some include a clause stating that if the market rental price drops, rent will not decrease.
The commercial property world has its own set of tax regulations that you will need to wrap your head around. Firstly, you need to pay GST when purchasing commercial property. However, as this is a business expense, the GST is fully refundable. Secondly, you are eligible for substantial depreciation allowances and, in some cases, building allowances. These generous tax benefits are a significant drawcard to this type of investment.
The lower the outgoings on your investment, the higher the profit you can reap. When investing in residential property, expenses such as council and water rates, body corporate fees and insurance are paid by the owner. In contrast, these are generally covered by the tenant in commercial properties.
You may save be able to save on painting and fit-out. As most businesses have a unique set of needs and a clear picture of what they want their new retail space or office to look like, they generally refurbish the space to suit their requirements. This can not only minimise your outgoing costs but add value to the property.
Despite predictions from some that the residential market has peaked, it remains an intensely competitive space. One only need to observe the lines of people queuing up at open inspections or the burgeoning crowds at auctions that block traffic. By comparison, the commercial market has a smaller number of players searching for that next perfect property. Less competition means you can purchase a commercial property with less stress and a higher probability of securing the right asset within a reasonable budget and timeframe.
Whether you are looking to diversify your portfolio, or are just starting your investment journey, the high returns, low expenses and tax perks make commercial real estate well worth the investment. To begin or continue your journey in commercial real estate, contact MCO today to discover the service that has made us Melbourne’s most trusted property agent for decades.