In this article, we’re here to help all those wondering if commercial real estate will be an investment that pays off!
Why it’s a good idea for your business to invest in commercial real estate
As it stands, yes, buying commercial real estate can be a wonderful investment for a business. There are various reasons that enable this investment to have exceptionally high yields – especially in the long run. Some of these reasons are:
- Commercial tenants can guarantee security - the security that having commercial tenants brings has the potential to yield strong returns. This is mainly because commercial tenants will have a reputation to uphold, whereas residential can be considerably more unpredictable
- The ability to build annual rental increases - seeing as most commercial properties can boast leases that last up to ten years in some cases, this means you’ll have the opportunity to have an assured rental increase for the duration of those leases
- The tightening of the commercial market – due to Australia’s “Goldilocks economy” and the resilience of these conditions, the result has been a yield compression and effective capital growth
Overall, commercial properties currently offer one of the highest cash flow opportunities in Australian real estate, especially compared to residential properties.
What are the different types of commercial properties you can invest in?
For those business owners looking to invest in commercial properties, there are four district asset classes to be aware of – each coming with its own set of risks and rewards. So, before diving into investing in a commercial property, we advise working closely with an expert investment advisor to see which properties are most suitable for your specific circumstances and which type of property might yield the best results. Here are the four asset classes in commercial real estate:
1. Industrial
Industrial properties can vary in size and usage, from small sites to major distribution centres. An important consideration to make when buying industrial property is the quality of the road networks, like the freeways and motorways, as you want to ensure that your property has optimal accessibility to the metropolitan areas, cargo docks and ports.
2. Office
Another type of commercial real estate that makes a great business investment is office space. This could be anything from a quaint suburban office to a high-rise building. For those interested in purchasing office space, a few major market factors you’ll need to consider before buying are business confidence, employment growth and even workplace flexibility changes.
3. Retail
When you’re looking to invest in retail tenancies, this could be anything from a small shop to an entire mall. Of course, you need to look at the general health of the economy when buying in retail, but other considerable market drivers include the time of year, consumer confidence, surrounding tenancy mix and income growth.
4. Speciality
One way you can yield impressive returns is by investing in speciality commercial real estate. This type of commercial property could include anything from hotels to childcare centres to service stations. As a business that is looking to invest in speciality real estate, a few market factors you need to consider are the general state of the economy, the business confidence in the particular sector you’re investing in, and, of course, interest rates.
What should you look for in commercial real estate?
While there’s potential, not all commercial properties will generate a healthy yield. There are a few factors you need to pay attention to when looking for a prime property to invest in. These factors include:
- Location - when you’re dealing with investing in property, the golden rule of “Location, location, location” applies especially to commercial properties. This factor could make or break your investment
- Tenants - almost as important as the building itself is considering the tenants that you are going to be leasing the property to. Spotting a commercial property with previous long-term tenants is highly desirable and often closely linked to the value of your property
- Building - when you’re investing in commercial property, the more well-maintained and modern the building, typically, the better the outcome
- Vacancy - to know if your prospective investment is going to generate a good yield, you’ve got to look at the vacancy rates. Commercial properties with a lot of vacant shops and offices is a good indication that there will be difficulties in the future
Final Thoughts
If you’re a business owner and looking to invest in commercial real estate, capital growth is looking fruitful in the foreseeable future as commercial investments continue to yield huge returns. However, it’s a long-term investment and there are various market factors that need to be carefully considered to ensure that this will be an investment that pays off. So, consult an investment advisor to see if your plans in commercial real estate will truly be the investment opportunity you’ve been looking for.
