Is it time to diversify?

Commercial property types include retail, industrial, offices and social infrastructure. Although there are similarities with residential property, commercial property is primarily used for business purposes. Commercial property is considered a more sophisticated investment than residential property. If you are considering diversifying it pays to do the numbers as there are key locations or tenancies that will help you get the best return.

There are several ways to invest in commercial property. You can invest directly through purchasing or via a listed real estate investment trust. Research suggests that many traditional investors are moving toward commercial searching for better yields in the current market.

Commercial property offers yields ranging from 4% to 12%, whereas residential property offers about 3% to 5%. It’s all about yield at the end of the day, and many investors like to spread their risk or diversify when they are growing their property portfolio, and it could be just a storage shed or an industrial unit that provides you with a higher return on your cash. An added benefit is that you can use your SMSF to invest in commercial property. However, the criteria are stricter than traditional lending, with tighter loan-to-value ratios. Many small business owners use their SMSF to purchase business premises and pay rent directly to the SMSF. Your accountant will be able to advise you.

One of the benefits of investing in commercial property is that leases offer a longer fixed term, usually 3-5-10 years, with annual rent increases adjusted for CPI. In addition, most commercial tenants use their rented premises to run a business, which means they have a stronger incentive to take care of the property. Also, tenants contribute to the outgoings, including building insurance and rates. Investing in Commercial property provides a unique inflation hedge for the well-diversified investor for two primary reasons. First, landlords can easily increase rental rates when prices rise to keep pace with even the most troublesome inflation as many leases are attached to inflationary-based rental increases (CPI). Second, supply and demand are the keys to making the best decision because they determine the price.

Given the cost of borrowing and average borrowing levels, you would expect commercial properties to be positively geared from day one. As business confidence is high, one would expect to see the demand for commercial properties also increase. This will flow through in the form of extra investor demand.

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Is it time to diversify?

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