Why Commercial Property Isn’t As Popular As Residential Real Estate

If you overhear any typical “property chat” at the pub, the driving range, the cafe or the hairdresser, the topic will almost certainly be about residential property. And if the conversation’s about commercial, it’s usually had by experts — dressed in suits or polos or R.M. Williams boots (it’s a real estate thing).

Commercial property investment simply isn’t as popular with regular investors as residential real estate. Why is that?

There are many myths about commercial real estate investing that we’re going to debunk today. Because for us at Properties & Pathways — having invested in commercial property for well over a decade — we’re often surprised at the stigmas attached to an asset class that’s performed very well for us and our co-owners (investors) over the years.

Of course, there’s no guarantee that commercial property will perform as well for you — or that it’s the right investment for you. That is for you to decide, using thorough due diligence and of course discussing the investment with your financial planner or accountant. As we’ll get to, every investment carries risk — that includes commercial property. We’re just here to talk about the misconceptions of the asset class.

The Myths of Commercial Property Investment

Myth: Way too big of a purchase

Commercial property typically falls into three categories, being office, industrial and retail properties. When thinking of any property in those categories, it’s probably large CBD buildings, huge warehouses and shopping centres that come to mind. Sure, syndicates and unlisted property funds like ours do invest in these prized assets — but it doesn’t mean that these assets are entry-level.

Debunking the myth: It can be possible to invest in high-quality commercial property well under $1 million. Office suites and shopfronts in good locations can have price tags that appeal to the average residential property buyer.

And if you’re unsure about how to approach a listed asset, then you can even consider investing alongside a commercial property investment company — search Google for “unlisted property trusts”, “commercial property syndicates” and you’ll find a plethora of options. Just ensure the fund manager has a solid track record, priorities investor communication and has proof of being incredibly transparent.

Myth: It’s overwhelming and complicated

Sure, commercial property investment can be complex. There are terms like “capitalisation rate”, “net yield” versus “gross yield” and “triple net lease”, which can throw investors. But we’ve found most of the complexities simply come from a lack of familiarity with the asset class.

Debunking the myth: Every investment can be complicated, and almost certainly will be if you’ve had no experience with it. Taking the time to conduct your own research and approaching an expert in the field can put you in the minority of investors who consider adding commercial real estate to their investment portfolio.

Myth: Vacancies are inevitable

A commercial property has the potential to become vacant, leaving the landlord with zero income and also the property outgoings to pay from their own pocket. This is the reality of investing in real estate, no matter the class.

Debunking the myth: But through solid due diligence, understanding the tenancy market, ensuring your property (or prospective property) aligns with the needs of occupants and keeping your tenants happy throughout their lease term (which, by the way, should be reviewed well before expiry) — you’ll go a long way to ensuring your property remains occupied.

Myth: Little to no capital growth

For capital growth opportunities, many investors look to residential property. The average house on the street mightn’t provide the yields that commercial property is known for, but they often promote a far stronger ability to grow in value over time. Commercial property, the sentiment goes, barely budges in value.

Debunking the myth: Commercial properties in high-growth areas or that beg for a hands-on investor to create value can appreciate in value. Looking for improvements like increased visibility, improved access and a better, more suitable tenant (we always like national or international occupants, with a solid track record) can help bolster the property value after you purchase it.

Straight to the point: is commercial property a risky investment?

We need to be clear on this: every investment carries risk. Commercial real estate is no different.

We’re proud of the returns we’ve achieved by investing in this space, but they are by no means guaranteed in the future. It’s up to the investor to do their own due diligence investigation on their prospective property purchase. When you intimately understand an investment, uncover all its inherent risks and devise a strategy to mitigate them, then the risks of investing can reduce.

For investors who aren’t prepared to take that risk themselves, there are plenty of other investment alternatives. There are also alternative paths to adding commercial property to your investment portfolio. Investing alongside a property fund manager can be one of those routes.

Want more information on investing in commercial real estate?

We offer commercial property syndicates to sophisticated investors across Australia (and even international investors). Every acquisition we consider undergoes a strict due diligence, ensuring we understand every opportunity and every risk associated with the asset—so it’s no accident that we’ve never lost our investors a dollar.

Get in touch with us today to find out what investment opportunities are on the horizon this year or to simply talk to us about the how and why of investing in commercial real estate.