Is buying a commercial property a good investment?

You may have wondered if buying commercial property is a good investment to make. We don’t blame you, especially if you’re looking for ways to diversify your investment portfolio. However, there are important differences between investing in quality commercial real estate and buying an office building, retail space or industrial lot. Buying commercial property may not be the right investment for you depending on your goals. Centuria Capital can help you make an informed decision about how to benefit from investing in commercial property in Australia.

The entry-level to commercial property investment

Commercial property is seen as a good investment because it has a few  key characteristics that individual investors tend to like, including:

• Liquidity – dependent on the way you invest in commercial property, including investing directly, via listed or unlisted commercial property funds
• Yield – driven by rental income
• Capital growth – buoyed by appreciation (property improvements) and land value.

However, the biggest deterrent to buying commercial property as a way to diversify a portfolio or realise a higher yield is the very large amount of money needed to buy commercial property – particularly for quality commercial real estate.

The mark of quality commercial property

The return on investment is driven by certain factors that feed into the quality of the commercial property. These can include the size, location, material grade and reputation of the architect which can all influence the ability of the landlord to sign quality tenants to longer term leases at higher rents. If you can afford to buy commercial property, you’ll want to be certain that the return on your investment is in line with your investment goals.  Rental income produces yield or the cash flow expected from an investment property. The rental income of a commercial property can therefore determine whether it is a good investment option for your portfolio.

Pro tip: When leasable space is scarce and demand is healthy, rental rates typically rise.

You should know that yield is affected by the details of a lease agreement. Commercial property leases for business tenants can last multiple years. However, in Australia, larger business’ leases last eight to ten years with a renewal option of three to five additional years. Additionally, the rent often increases at a fixed rate annually . We have prepared a handy guide to commercial leasing.

Downsides to buying commercial property

That all may sound appealing but there are downsides to buying commercial property. And don’t forget, you may have the ability to invest hundreds of thousands of dollars into a commercial property but may not have the deeper understanding of larger market forces that can make commercial property a good investment. It can take years to master the commercial real estate market in any given area like Sydney, Adelaide or Perth. In addition to the learning curve, there are a few other things to keep in mind when buying commercial property:

Vacancies

The stability and steadiness of a commercial property’s yield is negatively affected by vacancies which can be influenced by fluctuations in the economy, infrastructure changes, newer commercial developments or strong competition. The time it takes to find a quality commercial tenant negatively affects short-term yield and can be a threat to longer-term property value.

Gearing level

Commercial investments valued from to multi-millions typically receive bank loans and/or equity investment from individuals like you. This gearing level is important because it reflects the level of debt to income, which can either increase gains or losses to your investment.

Capital gains tax

Capital gains tax (CGT) applies to any sale of commercial real estate for more than the purchase price (net of cost basis) according to the Australian Taxation Office. Without getting into the calculations, it is important to note that in the event of a capital gain from selling an investment property, you will be required to pay CGT on that capital gain in addition to your income tax rate.

How can you invest in a quality commercial property?

We mentioned earlier that there are multiple ways to invest in commercial real estate — buying direct (as an individual, partnership or through a trust) or investing into a listed REIT or an unlisted fund. Selecting the right method of investing in retail, office, healthcare or industrial property depends on your situation. A specialist investment manager can provide you with the information you need to   as well as answer any of your questions. We recommend you seek financial advice from a licensed financial adviser.

For now, let’s run through some basics for commercial property investors.

Ways to invest in commercial property

There are three main types of commercial property investing including:

• Buy commercial property yourself.
• Invest in an unlisted property fund.
• Buy units in a listed Australian Real Estate Investment Trust (A-REIT) on the ASX.

As we’ve already mentioned, it can take years to become familiar with the real estate market, and the factors affecting the profitability of direct investment — finding a quality tenant, cost basis and capital gains taxes — make direct investment not as appealing to many people, especially considering the high price of entry.

Top considerations of investing in commercial property funds

Your choice will be based on several factors, but here are some basic ones to consider:

1. Availability of quality commercial real estate funds open to additional investors.
2. Amount of money you have to invest and the minimum amount required to invest.
3. Cash flow provided by a commercial real estate fund (A-REIT or unlisted fund).
4. Liquidity you need to cover your financial situation.

Centuria Capital offers investors quality commercial property investment funds at more reasonable entry points than buying the same high quality, industrial, office or healthcare real estate directly. Our open-ended and closed-ended unlisted commercial real estate funds are a more accessible way to invest in commercial property. These funds also benefit from longer lease terms and more regular frequency and formality of valuations than residential real estate. Investing in a quality commercial property fund also means you’re not managing the property. Many open-ended unlisted funds do offer periodic opportunities to withdraw funds for liquidity – but make sure you check the investment terms of any fund you are looking to invest in, suit your financial needs.

If you are considering diversifying your portfolio into an unlisted property fund that is investing in quality commercial property, you can invest in an open-ended property fund from $10,000 and a closed-end commercial property fund from $50,000 with Centuria.   You can register your interest to receive updates on future unlisted property fund opportunities.

Centuria Capital Group (ASX:CNI) is an ASX-listed specialist investment manager with 35 years of experience with a range of products and services for investors, advisers and securityholders. Contact us to learn more about investing in quality commercial property funds, today.

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