While I constantly focus on the residential property market in this newsletter, lately I’ve been getting a lot of questions about commercial real estate. With Australia’s tight housing supply, it makes sense that property investors are now looking beyond the glossy residential listings.
So, I chatted with Vanessa Rader, Ray White’s Head of Research, about why commercial property is so appealing – and what we need to know.
What is commercial property?
Think of office buildings, retail spaces, warehouses, industrial facilities, medical centres – basically all the properties in your community that aren’t occupied by people living in them. These are ‘commercial’ assets.
Vanessa says there is plenty to love about investing in property that isn’t residential.
High yields and set and forget
First up, she says commercial assets can offer strong returns with relatively hands-off management.
“Commercial property investment is a good way to diversify your property portfolio. Assets often provide higher yielding offerings .. for many assets, they are considered “set and forget” with long lease terms, and all outgoings paid,” she explains.
That long-term stability – where costs like rates, management, and insurance are covered by the tenants – can make commercial property pretty appealing.
“For investors willing to move up the risk curve, these can be lucrative investments,” adds Vanessa.
It’s also important to note that commercial property investing can be somewhat an “analytical” type of investment – meaning your decisions hinge on the wider economy, demand and new supply, as well as other factors like government regulation.
“You need to consider the actual asset and the broader market fundamentals of that asset class,” Vanessa says.
So beyond assessing whether potential tenants can pay the rent each month, you also need to consider if your tenant is likely to stay in business if there is an economic downturn. Or whether the local community needs another pizza shop or dental practice?
That said, for those who enjoy doing their research and tap into good advice, commercial property can be profitable.
So why isn’t everyone doing it?
A lot of investors never even look at commercial property, though.
I asked Vanessa why, and she believes this largely comes down to familiarity.
“Traditionally property investors have favoured residential. It’s more familiar as people live in a home or unit,” she explains. “Unless you occupy commercial property or have exposure to it, many investors do not even consider this an option.”
With all the property types, price points, and tricky financing, commercial real estate can also feel pretty overwhelming.
But if you’re willing to learn the ins and outs, and get a little help if needed, it’s a great way to earn passive income.
Commercial real estate as a retirement strategy
When transitioning out of the workforce or business, most money-minded people want to establish an alternate income stream.
While commercial rent can be just that, Vanessa has a big tip when looking to buy a property:
“Seek out assets with long term leases. While most commercial properties offer long leases, those assets with secure cash flows with a strong lease covenant would be the best way to secure an income stream in retirement.”
Vanessa acknowledges these lower-risk investments generally come with lower yields, but they compensate with stability… The rent comes in regularly.
Safe vs volatile
With commercial property, you can play it safe or take risks and chase the bigger yields. It really all comes down to your risk profile, the market, your tenants, and the kind of property you’re buying.
“At the moment, assets such as industrial which have low vacancy rates, rental growth potential and limited new supply potential, are considered safer,” Vanessa shares.
On the other end of the spectrum, office assets remain more volatile, with higher vacancies and limited rental growth.
Then there are the ‘specialised’ properties.
“Assets like childcare centres, where income is somewhat tied to government subsidies can also be considered safe, however local market dynamics and new supply can impact specific assets,” she says.
Whether you prefer safety or volatility, doing your research and homework is absolutely essential.
How to get started
Investing in commercial property isn’t just about clicking the ‘commercial’ tab on property listing sites.
Before you dive in, Vanessa suggests you:
Study the market – “Research is very important,” she states, pointing out economic conditions, local market demand and fluctuations must all be considered.
- Speak to lenders early – Financing commercial property is trickier than residential, with different rules for each asset and location, so Vanessa says getting a lender involved early is smart.
- Get expert help – Chat to those in the know – friends who have invested in commercial, your financial planner, or engage a commercial property buyer to help find the right property for you.
- Find a good property manager – Once the property’s yours, a skilled property manager is key. Commercial leases and tenant issues can be complicated – “You need an expert to help navigate this,” says Vanessa.
A marathon, not a sprint
I wholeheartedly agree with Vanessa when she describes commercial investing as a long-term investment play.
“Looking for quick wins can be dangerous in this market,” she says.
It’s smart advice. When it comes to building wealth, I always say slow and steady wins the race.
But if you stay calm and cautious and do your research, commercial real estate is worth considering.
