Rise of small-scale commercial investors

Lower yields and price growth outcomes for residential investors is increasing the appetite from this group for small-scale commercial sector investments.

Here are some compelling reasons why more residential investors will strat to look more favourably at investing in commercial and/or industrial property and why agents should be more aware of these opportunities.

Higher returns. The average rental return for residential properties across Australia’s capital cities is 3.6% according to CoreLogic.  When compared to between 8% and 12% gross rental yield for commercial properties this becomes very attractive.

The leases are longer.  Residential tenancies can turn over every six to 12 months, whereas a commercial tenancy can be anywhere between three and 10 years. Tenants also tend to stay longer especially when they’ve invested some capital customising the premises.

Some costs are borne by the tenant.   In residential properties, landlords wear the costs of council rates, water and body corporate, but with commercial properties this becomes the responsibility of the tenant.

It is easier to secure a commercial property.  Commercial properties are generally lower priced compared to residential properties so you need a smaller capital outlay. For example, a car park can cost as little as $80,000 as opposed to $400,000 for a small 1 bed apartment.

Commercial tenants are more commercial. They are business people and are used to negotiation and understand the realities of the business the owner is running.  Property investment is a business and as such commercial tenants understand the importance of good property maintenance and presentation and therefore will look after the investors property and pay particular attention to paying rent on time.

These are attractive reasons why more residential investors are starting to look at commercial property as a vehicle to diversify their portfolio.

I recently interviewed Dr Andrew Wilson from Australian Commercial Property and he said:  “Commercial investments typically produce higher yields than residential, but the irresistible hook of capital growth has typically supported significant interest from investors. Increased interest in higher yields in a low-yield economy is now focussing the attention of residential investors”.

Tougher lending conditions for residential investors have also acted to encourage traditional residential property investors to examine alternative investment vehicles.

The need for prudential portfolio diversity, particularly for the growing number of self-managed super funds, is also increasing investor interest in the commercial sector.

Activity in the commercial sector is increasingly reflecting growing demand for storage facilities which reflects the replacement of bricks and mortar shopfronts to a burgeoning online retail model.

Storage and logistics required to cater for the explosion in online retailing, is generating significant new development in bulky goods facilities and warehousing.   Opportunities for investment in this fast growing sector, either directly or through a share-style arrangement, are also increasing.

It appears to be just in time to cater for the rising interest in commercial sector investment – particularly from smaller-scale players.

Last year Greater Brisbane approved just under $1.9 billion for building in the Prime Commercial Supply sectors of retail, office and industrial (warehouse and factory) which was an increase of 9.2 percent compared to the previous year.

Planned warehouse development in Brisbane in 2017 totalled $432m which was remarkably just below the $483m approved for the previously dominant office sector.

Kevin Turner hosts a free daily podcast for real estate agents, business owners and property managers – Real Estate UNCUT.  Subscribe here.

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