Mindset adjustment required for commercial investment – Simon Staddon

With the slowing down of the residential investment market, a growing number of traditional residential investors are shifting their focus to the stronger underlying real estate attributes and superior tenants on offer in commercial property investment according to Simon Staddon.  He explains the potential and the possible pitfalls.
Transcript:

Kevin:
  With the slowing down of the residential investment market, a growing number of traditional residential investors are shifting their focus to the stronger underlying real estate attributes and superior tenants on offer in commercial property investment, according to Simon Staddon of Burgess Rawson.
They are a full-service Australia-wide agency carrying out sales, valuations, leasing, and managing commercial and residential investment property, and featured, of course, in the latest edition of Your Investment Property magazine. Simon joins me.
Good morning, Simon.
Simon:  Yes, good morning, Kevin. How are you?
Kevin:  Simon, has price-parity had a lot to do with the increase in the number of investors who are turning to commercial property investment?
Simon:  Yes, I think it has, Kevin. It just continues on, I suppose, with Aussie’s love affair with real estate generally. I think it’s fair to say they do love real estate and particularly, residential. But I’m always going to be very biased; I’ve been in commercial property for a very long time and I can see commercial property has huge advantages as far as I’m concerned.
But price-parity, yes, it comes back to the residential median house price very often. If you look in Sydney, the median house price, let’s call it circa over $1 million, but there has been a slowing of the residential market as you just indicated.
And there’s no question that traditional residential investors are now… We’re seeing a lot of it because we monitor enquiry and everything else in our agency, and there’s a lot of people coming out of residential because they’re not quite sure where it’s going, and the commercial investment market is just kicking along. Low interest rates still, and it really is business as usual. It’s a very strong commercial investment market at the moment, and that’s exactly the area of the market that we are very much at the coalface of things.
Kevin:  I want to ask you about the differences between residential and commercial, which we’ll get into in just a moment. But before I do, are you seeing a number of people diversifying out of residential, keeping their residential but adding commercial to their portfolio, and vice versa, I guess?
Simon:  Yeah, absolutely. And there’s a logical step… I think if someone has been a traditional residential investor for a number of years – and we’ve seen this in our agency – I think the first logical step is sometimes into an asset class like childcare, because obviously, it brings in elements of residential but is also a commercial asset class in its own right. It’s a very, very popular asset class.
I look back to, say, 2010/11, yields on childcare investments were around 8% believe it or not in that timeframe. 2017/18 now, they’ve compressed to under 5%. That’s a huge difference, but it’s a very hot sector and it’s a very logical thing for traditional “ressie” investors to come into. It’s obviously not the only asset class, but it’s a stepping stone, if that makes sense.
Kevin:  How does investing in commercial property vary from investing in residential property, putting aside the mindset, which I’ll deal with in just a moment?
Simon:  Again, I’ll come back to that point, Kevin, that I’m a little bit biased with commercial property generally, but there are so many advantages in many ways to commercial property. A lot of residential investors don’t realize that very often, under the terms of a commercial lease, a tenant might actually pay all the outgoings, which would include council rates, land tax, insurance, and land taxes really surprises people on a single-holding basis.
But the advantages obviously are the quality of tenant. We sell a lot of brand-name investments, and obviously, with residential property, you’re dealing with moms and dads or whatever, but with commercial property, you can secure a very good tenant who will pretty much look after everything in terms of outgoings.
In terms of rental increases, we’ve just been instructed on a property in Darlinghurst, a retail investment, and that has 4% annual increases, which is really a huge advantage because the value of your commercial investment will go up by the increment of 4%. And obviously, as the rent goes up, it is just a question of what yield is and the value of the property. The capital value of the property goes up as well.
Kevin:  Yes, you get a different style of tenant, don’t you? You get more of a business tenant as opposed to a residential/family, emotional type tenant as well.
Can I take you in another direction because we’re running out of time here, Simon? But I just want to ask you, does it actually require an adjustment in mindset for the investor to move into this area?
Simon:  Yes, I think it does. I think a residential investor is very location-specific. They have a location-specific mindset. With commercial property, the primary drivers over residential can be such things as asset class, strength of tenant profile, and the length of the lease. The length of the lease is very, very important. If you get a Coles as a tenant and you have it on a brand-new 15-year lease, it’s set and forget. And that mindset is very different.
Investors will go in any location. We sell property all over Australia. It’s really a numbers game, and the location is not the primary driver very often. I can give you lots of examples on that on fast foods or whatever where we’re selling Coffs Harbour, a Guzman y Gomez at 4.5%. That’s not based on the location. It’s based on asset class, length of lease, depreciation, etc.
Kevin:  And those factors, in some way, are determined by location, though, aren’t they? I know what you’re saying; the value of the property is determined by the strength of the lease. But would I be correct in saying the strength of the lease is sometimes determined by the location if it’s a prime location for the commercial property? A Coles is an example.
Simon:  A Coles, yes. It’s one of those things when people come to ask, they are inquiring on a commercial property we’re selling, not because of where it is, because of the tenant and the length of the lease.
Kevin:  That’s right. I do understand that.
Simon:  That’s the primary driver, very often. Obviously, location is still important – of course, it is – but a lot of people in residential find that surprising.
Kevin:  Yes. The point I was making – and maybe I didn’t make it clearly enough – was that the tenant will always look for a good location, particularly if it’s a Coles.
Simon:  Of course.
Kevin:  Exactly.
Simon:  Fast foods: McDonald’s, they’ve done on a lot of due diligence on their site. Exactly. It gives investors the confidence. If McDonald’s have done their DD on the site, it’s good enough for me.
Kevin:  Good stuff. Simon has been my guest. Simon Staddon. Simon is from Burgess Rawson and is featured in the latest edition of Your Investment Property magazine.
Simon, thank you so much for your time. I appreciate it.
Simon:  No problem, Kevin. Thank you. My pleasure.

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