Is commercial real estate a good investment?

Real estate investors have always been among the country’s wealthiest. Just take a look at each year’s AFR Rich List. And even if their primary career is not welded in property, their wealth is usually both grown and maintained via their interest in it. And it’s not just residential real estate they invest in. It’s commercial real estate too. Because commercial real estate—when acquired with the right amount of due diligence—can be a very good investment.

Here’s why…

1. You’ll enjoy stability and resilience

Office buildings, retail spaces and industrial warehouses. These commercial assets can provide reliable and lasting income streams for their owners. You can thank their lease agreements for that.

Unlike residential properties, lease tenures for commercial spaces tend to be far longer—ranging from three to ten years (and even more)—offering more security for investors. And because there’s a business occupying the premises, they have every intention to ensure the space remains in excellent condition, sometimes even paying for fit-outs (i.e. property improvements) out of their own pocket.

Australia’s robust economy and sound regulatory framework contribute to the stability of its commercial real estate market. And when occupied by high-performing tenants (particularly essential services tenants), your rental income can be protected from events like COVID-19. Just like ours was in every one of our commercial assets.

2. High yields are expected

It’s well known that commercial properties typically offer higher rental yields compared to residential properties. After all, a business is occupying the space, and they’re willing to pay a premium to conduct their operations in it.

A good return in commercial real estate will range from 5 per cent to 10 per cent (sometimes even higher). Remember there are both gross yields and net yields, so you’ll need to know which one you’re calculating before determining whether commercial property is a good investment for you.

Due diligence is everything when ensuring a strong yield. Investors who know how to conduct a sound investigation and can fill their commercial property with an excellent national- or multinational tenant will be in a very good stead to do so.

3. Diversification

Commercial real estate allows investors to diversify their portfolios beyond traditional asset classes like shares, bonds and residential real estate.

Adding a commercial asset to your investment mix means you can hedge against market volatility and reduce your overall risk exposure. Because nobody wants all their eggs in one basket.

4. You’ll have the opportunity for serious capital growth

Rental income is of course a significant component of commercial real estate returns. But one element of the total return that many disregard is commercial real estate’s propensity to produce serious capital growth.

There are many factors that can influence capital appreciation of your commercial real estate asset. The market may influence it, as supply tightens and demand grows. So can the locale of your investment, with urbanisation, population growth and infrastructure all playing a part in your asset’s value.

But so can value-add strategies.

By understanding your property intimately—knowing its flaws and potential—you might discover some excellent capital growth opportunities. The tenancy mix could be enhanced, the signage made more prominent, the facade improved, the usage altered. These are just high-level ideas. The important thing is first understanding your asset and that—once again—is achieved through an intense due diligence investigation before you buy.

5. Tax benefits are everywhere

Commercial real estate investors enjoy a range of tax incentives and deductions.

Depreciation allowances, capital gains tax concessions and deductions for expenses such as maintenance, repairs and loan interest can significantly reduce the tax burden associated with owning a commercial property.

These tax advantages enhance the overall return on investment and improve cash flow for investors. For those investors who typically prefer shares and bonds, which can offer little tax incentive, commercial real estate can be a desirable investment.

Self-managed super fund members are also commonly invested in commercial real estate for its tax incentives. We wrote an entire white paper on that exact topic. Download it for free here.

6. You can hedge inflation

Commercial real estate can serve as a natural hedge against inflation.

As prices of goods and services rise over time, so too can rental incomes and property values. Leases often include provisions for periodic rent increases—either linked to inflation (i.e. the Consumer Price Index, or CPI) or market rates—ensuring that rental income keeps pace with rising costs.

This inflation protection helps you preserve purchasing power and is another reason most investors will tell you that commercial real estate is a good investment.

7. Diverse investment options are available

Of course, the first assumption by many is that they need to own commercial real estate outright and on their own. That’s not the case.

There are many investment vehicles that aid investors in getting into the commercial real estate market, with Real Estate Investment Trusts (REITs) and unlisted property trusts being among the most popular. These funds allow individual investors to pool their capital with other like minded investors and acquire high-price tag commercial property that would otherwise be out of their reach.

These managed funds, also known as real estate syndicates, mean your hands are off the wheel and your investment is driven by real estate experts. You’ll leverage their nous, their years of experience and their wide and deep network of property and legal professionals.

So, is commercial property a good investment?

In our opinion, it absolutely is. We’re a commercial property investment company. We’ve been in business for over a decade and have produced exciting and prosperous investment opportunities for hundreds of Australians. We’ve ridden economic waves, we’ve bought and divested countless commercial assets across the country, and we’ve never lost our investors a dollar. For us, commercial real estate is an exceptional investment. But is it for you?

Get in touch with us to find out.