Most investors are comfortable investing in something they are familiar with like residential property. People understand well that experience since they have either rented property or purchased a unit or house.
Commercial property on its part is more mysterious than a residential property but a valid option for Australian purchasers.
A good commercial property investor needs to comprehend complex market factors, property management options, potential risks, leasing arrangements and unique financing requirements.
Irrespective of the commercial investment properties, whether industrial, office or retail, a proper understanding of these factors will guarantee you a reliable investment.
Here are some useful considerations that will help you locate suitable investment opportunities, both for small and large commercial property.
The commercial property market drivers
Commercial property growth is sometimes affected by the same key driver as residential property, which is the demand pressure. Additionally, other factors like population growth and economic factors also drive commercial demand.
Strong local, national and international economies greatly support booming commercial markets. Thus, any successful commercial property investment will require strong supportive economy.
When the economy begins to grow, increase in raw material demand for manufacturing goods, increase in imported goods demand and increase in building demand will drive the transport companies to grow. An upsurge in transport stocks will increase business and earn leading to more jobs being available and eventually lead to increase in office space demand. Thus, this simply implies that as the economy grows, demand will initiate in the warehouse space, then spread to the retail and later head to the office.
It is another factor that affects commercial property demand. To manage inflation, Reserve Bank of Australia normally manipulates the interest rates. When it increases interest rates, economic growth will be slowed down since it will lead the cost of money to be higher making a reduction in the rate at which companies can grow. Likewise, as interest rates increase, consumer spending will reduce. As a consequence, there will be slow in demand for both residential and commercial properties.
Demand for commercial property increases in a place where there is infrastructure development taking place. For instance, when M7 bypass located on Sydney’s western outskirts was opened it led to increasing in warehouse property demand in the outer ring that is near where M7 exits. Also accessibility to nice roads and cheap land influences companies to consider moving the warehouse facilities in those proximities.
Naturally, as a segment of a particular population is motivated to locate to a different area, they usually create new opportunities. For instance, Upsurge of baby boomers in coastal centers led to the health care services to be demanded in a great measure. Likewise, increase in new suburbs that are composed young families created the need for greater childcare facilities.
More people now prefer to work in places that are near their homes as the emphasis is increasingly put on lifestyle. As a result, the number of small offices that are located in lifestyle suburbs has increased like Sydney’s northern beaches area.
Usually, many services are needed in places experiencing strong population growth. Whenever new suburbs spring up, there occurs an increase in consumer demand which will necessitate for shopping centers to be set up to cater for the demand. Grocery stores will crop up, then later specialty shops and cafes that will accompany small industrial support services and afterward, office spaces will be built.
Consumer spending usually upsurges product demand leading to the need for more retail outlets and warehousing to be set up.
Understanding of risks
If you research a commercial property investment very well, you will get a lucrative property that will need little attention once tenanted. Additionally, an investor who is fully aware of the risks will be prepared to deal with adverse circumstances when they appear.
Risks usually emanate from:
Though it is advantageous to have long-term leases that are 3-5 years or even longer, it can be painstaking as finding a tenant to occupy the property after it becomes vacant can take long. Such it is common to have such prolonged vacancy periods, but an investor will need to cover the carrying costs that occurs at that period.
commercial property Size
It is easier to lease small suites compared to large commercial properties that involve more costs when holding it.
When supply conditions changes, many potential problems emanate. As new properties crop up in the same area, it will pose a threat to the existing tenancies since some tenants will prefer to expand or upgrade to those sections. Thus, a strong supply usually reduces potential yields.
Major changes or implementations in infrastructure affect either positively or negatively commercial property returns. An infrastructure set up in an area can attract several commercial investments. However, its negative effect is that it draws tenants away from certain areas. Areas that are proximate to the CBD are always populous while new growth areas further away tend to possess more noticeable cycles.
Depending on the purpose, any group of people, whether individuals, companies, trust or syndicates of investors, can acquire commercial properties. A Self-Managed Super Fund (SMSF) would create an ideal structure for individuals or a group that has less than five members. It can be utilized to buy a property outrightly where no mortgage is needed. Investors can benefit from tax benefits when they use SMSF.
Funding a commercial property is usually more complex than a residential property. Those complexities that occur in certain situations normally make some financiers specialize in commercial property finance.
Depending on the yields/ rent expected from a property, banks will provide the needed finance but in most cases it normally up to 70% lending.
Commercial agents are the ones involved in managing a commercial property performing their duties as dealmakers rather than traditional residential agents.
An agent can check which business is appropriate for a particular property. Doing that makes it easy to arrange attractive deals that lure prospective businesses such as free fit-outs, rent-free periods.
The information found in the lease can make a commercial investment viable or unviable.
The details in the lease can make or break a commercial investment. So as an investor in the commercial property market, you should consider the following:
Commercial leases have a longer duration period in comparison to residential leases which may take six or 12 months. Those leases usually can have 3, 5, or even 10 years as it gives you the option to renew.
it is more advantageous to own a commercial property since the tenants pay nearly all the outgoings that may entail, insurance, repairs, rates, water, corporate body fees, council rates, and even maintenance.
It is allowable for a tenant can make any physical changes that suit the place like installing some partitions. However, the owner should have the right to return the place to its original position, whether it is office, warehouse or shop when the tenant leaves. It will put the place ready for a new tenant when the current one exits.
A special council approval will be required in some tenancy types. For instance, childcare centers, medical centers, chemical treatment facilities and others. The Department of Lands (NSW) will register leases that have a certain value.
Cost of entry
It is good for an investor to comprehend that purchasing a commercial property much expensive in comparison to purchasing a residential property. Regarding the location, retail space or CBD office tend to be the most expensive space that one can acquire. The size of the purchased property can make an Industrial property located on the city’s outskirts to be expensive. When you purchase in smaller strata premises, you will be able to minimize the costs.
Commercial property type
A keen investor should analyze the property type that suits the needs of that place. There are several commercial properties available, but the three main forms that are common to investors are the retail, office and industrial. An investor will establish the commercial property type depending on what type of clientele to be targeted. For instance, if it is the manufacturing, investment will be either an assembly unit or a warehouse; for the business community, investments are like malls and retail centers; and for official clientele, investments in offices are appropriate.
For investors seeking to enter the commercial property market, ‘off-the-plan’ or Small new warehouses or commercial suites that are set up in high-demand areas are usually a low-risk option. In the first year, an investor will need over $250,000 as the entry price range to guarantee initial returns. Afterward, yearly CPI increases at regular intervals will enable reasonable yields to be maintained.
The attractiveness of a particular commercial investment is increased when an investor can let newly finished warehouses or offices.
However, such a notion should not negate the importance of an investor to understand and manage associated risks appropriately. Thus, the information that the guide has unleashed is useful for any investor who is just starting in the commercial market to obtain viable commercial deals.