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Demographic and economic changes are driving demand for income. Office real estate remains a strong income-generating investment opportunity – but the magic formula in a low growth, low rate world is knowing your tenants and their employees’ needs.
Office Real Estate can be defined as those commercial properties which accommodate business activities. The property could be an office tower, within a business park or small suburban office buildings. Office buildings typically require desk or working space, meeting rooms, technology and amenities to facilitate a tenant’s operations.
Office workers can work in a huge range of businesses including finance, government, insurance, information technology, resources, media and education.
Office real estate has been popular with investors over the years because of its solid characteristics. Income is provided to investors through the collection of rents from the tenants and office buildings are generally situated in attractive locations with strong underlying real estate fundamentals.
Office tenants generally sign longer leases than those commonly seen in residential real estate, which provides income security to the owners of the premises. Longer leases provide business continuity to the tenant and the high costs of an office fit out can make moving prohibitively expensive. Leases in office real estate often also have built in annual rental increases, meaning the rent grows over time.
The yields associated with office property are also generally higher than those we see in residential real estate. Commercial properties typically offer rental yields between 5% and 7%, compared to residential properties which typically offer yields of around 2-4%. This results in commercial office investments being more likely to generate greater income returns than residential investment properties1.
There has been some speculation on the future of office due to enforced work from home policies resulting from the impacts of COVID-19. If COVID-19 has taught us anything, it is that humans enjoy and require social interaction, and it is becoming increasingly apparent that many tenants recognise productivity that results from in-person collaboration cannot be replicated virtually. Additionally, employee isolation has a detrimental impact on an organisation’s culture and staff wellbeing. The office remains key to a business’ ability to generate ideas, execute strategies and engage with their workforce.
If you want to share in the benefits of office property investing, there are a couple of different options available to you as an investor:
|Real estate agents sell whole properties or individual suites, some of which can be cost prohibitive to individual investors.|
|Property fund managers offer the ability to buy a “share” in an asset in the form of an office property fund – this usually has a minimum investment amount.|
|Listed entities where you buy and sell securities/shares in a trust on the ASX (such as ASX:COF).|
Buying a direct property as a sole investor could carry more risk due to the high cost of exposure to the individual property.
By investing via an unlisted property fund or in a listed REIT, you are placing your trust in the property fund manager and responsible entity. Property funds managers are regulated by ASIC and you should always make sure they have longevity and a strong track record, particularly in the specific market you are interested in investing.
Choosing the right office to invest in is not the straightforward pick it once was. Today’s employees, businesses and office tenants are now more complex than they once were and this has altered their demands and expectations. So, what now drives the demand for office buildings?
Businesses and their employees now desire a more streamlined commute to work. The key lesson from a study2 into employee satisfaction found that for employers transport links are important – because an easy commute will increase employee satisfaction and engagement – and this translates into better productivity and a better bottom line.
A recent business services survey3 found that what employees most want is for their office to be near home, but that if this isn’t possible, then they want a seamless commute.
In theory, open plan, modern and airy spaces with endless scope for teamwork and collaboration can make us all more creative and productive. Whether or not you believe that contemporary open plan, zoned work spaces, or the old-fashioned individual cubicle or office is the more efficient, it seems that the real answer to what works best lies in flexibility. In other words, a flexible office design should have a layout which balances employees’ desire for collaboration, with the ability to find privacy to complete tasks when necessary.
Another factor which has a serious impact on employee wellbeing is the quality of the air and natural light in an office. These factors have been found to out-rank everything when it comes to workplace wellness4. Proximity and exposure to natural light is particularly beneficial, but even the colour of artificial lighting can make a difference.
Once considered to be factors entirely unconnected with work, health and wellness have grown in importance as part of a more holistic understanding of wellbeing. Many of the amenities employees expect are tied to improving their health and wellbeing. An additional element of the link between work and health and wellbeing, is the desire of employees to be able to walk, cycle or run to work. As a result it is becoming common place for office buildings to provide ‘end of trip’ facilities where employees can change, shower and store their bikes and fitness equipment.
So what does this mean for investors? In general terms, newer buildings are more likely to have been designed with natural light and better services in mind – however, older buildings which have been refurbished by a diligent landlord who understands tenant and employee expectations of the space, can be equally as good.
In addition to the quality of the property, the experience and track record of the manager, is crucial. Modern buildings may have some of the layout and amenities that employees favour, but older buildings can sometimes represent good value if they can be refurbished to a comparable standard.
An office property is more than what’s inside its walls. Tenants also consider offices by the neighbourhood of conveniences that surround them. Where a tenant is located may not be just about work – the ability of employees to undertake other aspects of their life is also crucial. Selecting office investments that are surrounded by substantial amenities that provide a variety of services and opportunities for community interaction can go a long way to helping employers (tenants) maintain a happy and productive workforce.
If you have always wanted to invest in commercial real estate but weren’t sure how to get started, then this resource should help you to understand the commercial property market so you can make more informed investment decisions.