Winning with Commercial Property

By David Servi

Investors who want a higher financial yield from their property investments should really stop to consider commercial property. Shops, offices, warehouses, small factories, workshops, cafes and restaurant premises: they can all provide a substantial return on the property investment dollar, and, for various reasons, they are rarely on the radar of the smaller investor.

Spencer & Servi has decades of experience with commercial property, and we’re here to help.

The phrase commercial real estate can conjure up visions of vast and complicated office block investments, but even the tiny corner shop is a commercial property, as is the two-room office suite in the local medical centre.

While residential real estate, in inner Sydney particularly, has had sky-high capital growth in recent years, the annual rental returns are in the region of 2 to 3 per cent, whereas for a commercial property of roughly the same value, the returns might be between 5.5 and 6 per cent.

And these days, with so many former industrial spaces in suburbs such as Alexandria and Rosebery transformed into fashionable residential property, tenant demand is high for suitable commercial properties.

Commercial properties generally have far longer leases than residential real estate: often at least three to five years, with optional extensions. This can mean long periods of trouble-free income.

On the other hand, and maybe because of the longer leases, commercial properties can remain vacant for longer than residential real estate; and owners must be financially prepared to ride out the waiting time, which could be months without any return at all. Negotiations on a lease can take time, and often tenants expect, and even demand, a rent-free period to set up shop (which could be a retail outlet, a dry-cleaners, or an art gallery).

Sorting out finance for commercial properties can be tricky too, with lenders usually demanding bigger deposits, but regardless of the downside, investors should at least think about putting their money into commercial bricks and mortar.

Factors affecting the desirability of a commercial property for tenants include the location, the size, the access, the facilities, the surrounding infrastructure, and of course the cost. Some commercial property investors want to minimise the hassle, and so they put their money into a simple city office suite, which is likely to have a high tenancy rate and few potential difficulties.

As with all investments, the canny buyer will look at potential trends that will bump up the rental value, particularly if they are pinpointed early in their trajectory.

Maybe that once boring suburb that has become increasingly sought-after because of its proximity to the city (anything within seven kilometres of the CBD is a pretty good bet) will be chosen as the site of a new gourmet-type shopping centre, pushing up the commercial value of nearby sites.

Changes in public transport availability can boost the desirability of commercial properties (the new light rail line from Central to Randwick and Kensington is likely to have an impact when it is finally completed). Potential zoning changes can offer the potential of building up, or out, or beside, or transforming commercial into residential with a rebuild.

Some careful commercial property investors will rightly be concerned about the future of high street retail, especially as on-line shopping becomes more and more popular, (and remembering that the on-line giant Amazon has just launched in Australia).

With so many pieces to be slotted into the jigsaw puzzle of commercial property investment, it is a good idea to consult the experts. Here at Spencer & Servi, we’re ready to help.