Since the global financial crisis there has been a decrease in commercial property prices, resulting in higher yields.
This has attracted a growing number of investors to consider commercial property as an appealing addition to their portfolios.
Calculating a strong return
Part of what is attracting new investors is the proportionally high yields that can be achieved from commercial property investments.
A yield is calculated by dividing the property’s net yearly rent by the purchase price.
So, for instance, if a property is sold for $700,000 and the lease is worth $60,000 excluding outgoings, then the yield is 8.7 per cent.
If the price is lower, say $600,000, but the rent remains the same the yield climbs to 10 per cent and a greater return on investment is achieved.
So who’s buying?
Many of the investors are owner-occupiers or trustees of self-managed superannuation funds (SMSF).
John Frame, from broking house the Loan Clinic, says the typical commercial investor has a higher than normal risk appetite.
‘Your typical buyer has a larger propensity to take on risk because there’s a possibility that the property will be vacated and you may find it takes a long time to get another tenant signed on,’ Frame says.
Investing in your own business
Banks will also factor this potential risk when deciding whether to lend. Often they will only lend on a short-term basis (such as for the duration of the lease) in order to reduce their own exposure to default.
For this reason, buyers are often self-employed people who lease the premises back to their own businesses, thereby eliminating the need to rely on a tenant.
A large potential windfall
‘For others the risk trade-off is the higher yield they can achieve with commercial assets compared to other types of investments such as residential, bonds or shares,’ says Frame.
Estimates of commercial holdings within SMSF hover around 12 per cent, which is double the figure these funds invest in residential real estate.
Look for a long lease
‘Savvy commercial investors look for a property that has a tenant on a long lease in an area where there are established anchor tenants, such as a supermarket, bank, post office or pharmacy,’ Frame says
‘If the property has a parking lot, all the better, because that’s a drawcard for your tenant’s customers.’
Investing with your SMSF
SMSFs began snapping up commercial property in significant numbers from 2010 onwards, when prices softened, and the government rules around the type of investments that small super funds could make were relaxed.
Previously, some investors might’ve been deterred from buying commercial assets because of the larger deposit that lenders require for a commercial investment (often more than a third of the purchase price).
Today, however, buyers can gear their SMSFs to borrow for a property purchase. Those thinking of doing so should seek good financial advice first.