Where commercial investment opportunities exist – Brad Beer

With the residential property market cooling in different parts of Australia, many investors are considering commercial properties.   Investment is up 46%!  Brad Beer helps put this category under the microscope by detailing some of the growth areas and advantages of investing in commercial property, the areas that have experienced growth, and are becoming popular with investors.
Kevin:   Well, with the residential property market cooling in different parts of Australia, many investors are considering commercial properties.
Kevin:   According to the 2018 Collier’s Office Markets Investment Review, approximately $18.96 billion in investment sales occurred nationally during 2017 and 2018, the financial year. That was a 46% increase on the previous financial year. Both sales volumes and transaction numbers increased, with 174 assets sold over 2017 and 2018, compared to 144 the previous year.
Kevin:   Now, if you are considering looking at commercial office building as an investment, you’re going to want to listen to this conversation that I had with Brad Beer. Brad is the Chief Executive Officer at BMT Tax Depreciation. Brad, thanks again for your time.
Brad:   Kevin, always enjoy coming along and-
Kevin:   Good on you.
Brad:   Having a chat.
Kevin:   Yeah. Well done, mate. Well, we’re talking about commercial, which we don’t do enough of, but it is a fascinating area for us to dig into. If we can talk about some of the growth areas and advantages of investing in commercial property, what are the areas that have experienced growth, and are becoming popular with investors, Brad?
Brad:   Well, you know, some of the data we look at is the piece there. Then we’ll talk some of the BMT numbers and what we see as well. But Sydney, Melbourne, Brisbane have been a bit more hot over the last little while for investors in commercial office space. A bit more demand than there has been in previous years, and I think the reason for that, partly around declining vacancy rates, obviously.
Brad:   National office rates were, or vacancy rates, the lowest in about five years, at about 9%. So Sydney offices 4.6, Melbourne’s 3.6%, so … That’s one of the big risks of commercial property is vacancy, I guess. When there’s a bit more vacancy, people get a bit more scared-
Kevin:   Yeah.
Brad:   Therefore we get lower vacancy, then, and don’t build too much stuff. Then people take it up, and less vacancy.
Kevin:   Well, I guess depreciation schedules are a good indicator about where the market’s heading, or the number of them. What have you seen? What does BMT Data show in terms of growth?
Brad:   Ah, we’ve seen some growth in commercial. We’ve always done nonresidential depreciation schedules in the 20 years I’ve been at BMT, but some people think we still only do residential ones-
Kevin:   Yeah.
Brad:   But so, we’ve been growing that over time. But some, the commercial … sorry, the commercial offices over the 18-19 year, second half of the year … Sorry, the first half of year-
Kevin:   Yeah.
Brad:   Is about 5% up. A lot of transactions on farms-
Kevin:   Oh, okay.
Brad:   We had a substantial increase, and, look, an 80-odd percent increase in agricultural properties from the same period in the … in second half of the previous year.
Kevin:   Are they classed as commercial, are they?
Brad:   Well, anything nonresidential-
Kevin:   Nonresidential, yeah.
Brad:   We sort of, we don’t class them as, obviously, offices.
Kevin:   No.
Brad:   But “nonresidential” to us, I suppose, is the term we use more regularly. A lot of increase in child care centres, which has obviously been an area, that, more child centres needed. So I see a bit of a shortage of those things going on. Industrial buildings, things like … we’re getting a bit more of the Amazon, the delivery stuff online-
Kevin:   Oh, yes.
Brad:   That’s required a bit more industrial type facilities, and we have seen a good increase in those. Then also Nursing Homes are another area, that we’re all getting older and we need more nusing homes.
Kevin:   I was going to ask you about that. I mean, that’s one of the big growth areas, isn’t it, aged care? I was going to ask whether you’re seeing an uptake in that.
Brad:   Well, the first six months of this financial year, 50% more of them we’ve done-
Kevin:   Wow.
Brad:   In depreciation schedules than the same period the last year, so-
Kevin:   That answered that question.
Brad:   Pretty solid increase.
Kevin:   Yeah, yeah.
Brad:   It wasn’t like … we still did plenty of them in the previous years. Look, that’s probably a higher growth in depreciation numbers. Then suddenly, they built 50% more, of course, but … maybe they’re learning and realising they need depreciation at the same time, which is always great for us.
Kevin:   Yeah. Well, what are the advantages of investing in a commercial property, Brad?
Brad:   Well, look I think, big thing is around, is often just around yield. Residential property yields in Australia are pretty light in most, especially capital cities, and yields are just higher. So that the cash flow requirement to fund or to maintain a commercial property of most sorts is generally a bit less. And it obviously comes with some risks and vacancies. And one of those big risk that just, really, yield is one of the things that seems to be the big push.
Kevin:   Are there many differences in how depreciation deductions are calculated? Say for residential property, or residential rental property, and non-residential property? Commercial property?
Brad:   Well, firstly, I guess, one of the other advantages is that often, the depreciation’s higher. Because there’s a lot of plant equipment, and things, and-
Kevin:   Yeah.
Brad:   The way that we’re calculating in the two areas, on the construction cost of the building, that we get a percentage each year of the Division 43 or capital works allowances. That actually, starts for buildings that are built since July ’82, instead of September ’87. So you actually get this deduction on a structure on a building that’s a bit older if it’s a nonresidential property. Some of those times, rather than being 2.5%, it’s 4% in those early years.
Brad:   Look, there’s potentially a slightly older building that can still get some better deductions. The other big thing is that the budget changes in 2017 that were made don’t affect a nonresidential property owner at all. So after that day, the secondhand plant and equipment items, you can still actually make deductions for and there’s also a bigger list of them. There’s less than 200 particular items in a residential house, but there’s about, there’s a list of about 6,000 assets that are, could be in a commercial premises or business.
Kevin:   Yeah.
Brad:   There’s just potentially some good deductions there.
Kevin:   Yeah, well, talking about commercial property, because there’s obviously a huge opportunity there, let’s look at fitouts, commercial fitouts. Sometimes they’re provided by the owners. Sometimes they’re set up by the tenant, in most cases, by the tenant. Can you explain how commercial fitout is claimed by a tenant of a commercial property, versus what the owner can claim?
Brad:   Yeah, look, the actual sort of claim is very similar in respect to, if you’ve got an item, you get to claim a deduction for it. But we often do … they’re a bit more complex in a commercial space.
Brad:   You’ve got the building itself, and the base of that building, and then the tenant, whoever that is, which is often different to the owner, makes deductions against all the things that they put in there. Now a lot of those things are loose, and they’re fitouts, and they’re plant and equipment. So the deductions can be quite substantial in those situations.
Brad:   Then sometimes, when you have to refit, sometimes, there’s opportunity to try and write those things off even a bit quicker if the accountant’s got some comfort over the level of requirement to fix them up at the end. So it’s a lot of deductions. All the money that gets spent in these expensive fitouts, sometimes, you want make sure that they get, it gets claimed.
Kevin:   Yeah. No, good advice. Yeah, okay, Brad. Thank you very much for your time. Once again, good to be able to clear up the fact that BMT do more than just residential depreciation schedules, as well-
Brad:   Yeah.
Kevin:   So there’s a lot involved in it, Brad. Thanks very much for your time.
Brad:   No worries. Great to be here as always. Thanks, Kevin.

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