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Why you should be considering commercial property

Friday, 15th Nov 2019

Commercial property will often get overlooked by investors in favour of the more familiar residential sector.

Although it’s natural for buyers to want to stay in the market they’re most familiar with, there are also a number of benefits that could come with diversifying into the commercial sector, especially as your financial and investment needs grow over time.

In fact, while most start their investment portfolio in the residential market, savvy investors will often look to incorporate commercial property into their portfolio as they progress in their investment journey.

So why should you consider adding commercial property to your portfolio?

Diversification into different markets

The first reason is simple – commercial property can offer exposure to an alternative market which is subject to different fluctuations from the residential sector. While both are somewhat influenced by macro-economic factors such as population and economic growth, on a micro-level commercial markets and the varying segments within them (i.e. industrial, retail and office) will fluctuate according to their own market influencers and will often experience growth at different intervals. This can hold a number of benefits from both a risk and opportunity perspective by reducing an investor’s exposure to a single market (and hence its downturns) whilst also enabling them to take advantage of growth cycles in different segments.

Higher cash flow returns

Exposure to different markets isn’t the only benefit commercial property can offer in terms of diversification. Generally speaking, commercial properties will offer much higher returns than the residential sector, with net yields typically ranging from 6-8% as opposed to the 3-4% often associated with residential properties. This does, of course, generally come with a lower capital growth focus, which is why residential and commercial assets often work well when combined together into a diversified property portfolio. For investors who have already built a sizeable portfolio of residential properties, commercial property can be a great way to balance their portfolio with different wealth creation strategies, or alternatively provide an alternative source of income for cash-flow focused investors such as those nearing retirement.

Fewer outgoing expenses

There are a number of other benefits that come with investing in commercial property, one of the main ones being that investors are able to recover outgoings from the tenant. This means that expenses such as council rates, land tax, insurance, and repairs and maintenance are generally covered by commercial tenants, with landlords facing fewer ongoing costs as a result.

Longer lease terms

In addition to lower outgoing costs, the lease terms on commercial assets will generally be much longer than the 12 month leases we often associate with residential properties, with standard commercial leases ranging anywhere from five to fifteen years. This can be highly beneficial for investors seeking a stable income stream, with many commercial leases also containing fixed annual rental increases to support rental growth over time. While reducing the likelihood of frequent vacancy and re-leasing periods, this does however increase the risk of longer vacancies when a tenant leaves, so it’s important to have a strong and proactive management strategy in place to combat this.

But commercial property is too expensive…

While commercial property can be a great addition to an investor’s portfolio, the biggest hurdle for many buyers is the high cost of good quality commercial assets. These can range anywhere from $2 million to $20 million and above for high-quality properties, which needless to say isn’t within the financial reach of most investors (let alone the risk associated with putting all this capital into a single asset).

However, this isn’t the only means of gaining exposure to the commercial market. A growing number of investors are looking for different ways to access the commercial sector, with many finding a viable alternative in pooled funds and commercial property trusts. These options can offer the same benefits in terms of exposure to alternative markets and cash flow returns, but without the same risk and capital outlay associated with investing directly in a single commercial asset.

Want to learn more about commercial property funds? Download the latest guidebook from our sister company, Mair Property Funds, or visit their website for more information on their upcoming investment opportunities.