Lured into investing in commercial property because of the prospect of better returns than residential property?
Take a step back and analyse the real returns your property might generate.
Investors often focus on the net asking rent, but this can be substantially lower than what is negotiated on the lease, says Fred Nucara, director at Melbourne-based agent, Beller Commercial, in an article in Fairfax Media.
“You might buy property on 5 per cent return expectation, but after the rent-free period, marketing, agents’ fees and other costs are factored in, it could be as low as 2 per cent.”
Also, don’t forget the upgrade costs, if any. While upgrading a residential property is relatively cheap (painting, floor coverings, kitchen and bathroom can fit into a budget of $30,000).
Refurbishing a commercial building is a different story. It could mean new air-conditioning, upgrading to make the property compliant with new health and safety standards, and other infrastructure like refits, parking spaces etc can cost upwards of 100s of thousands of dollars.
One good aspect is that the refurbishing costs are not always borne by the owner.
One of the advantages of renting out a commercial property is that the tenant usually pays most of the outgoings, such as council rates, insurance, repairs and maintenance. Most commercial property ads for tenanted properties usually mention this.
So, most of the rent collected by the owner is retained unlike in residential property where the council rates, taxes and most repairs are borne by the owner and comes out of the rent.
Demand from yield-hungry investors who are “gun shy of the share market” is hot for property priced between $500,000 and $3 million, he says.
Investors should expect returns of between 3-4.5 per cent for a Melbourne office or retail property in metro areas and between 4.5 and 6 per cent if they invest regionally.
As far as capital growth goes, one can expect at least a 30 per cent increase in values over a seven-year period, and even more if they are within 10 kilometres of the CBD, says Nucara.
But that doesn’t mean that only the CBD and a radius of 10 km is the only place to invest. Angus Raine, executive chairman of the Raine & Horne Group, says investors should not discount the opportunities outside of metro areas, because of the lower pricing and higher yields higher because the investment market is not nearly as deep.
“I am a great believer in regional and sub-regional markets. In Victoria and NSW there are major inland cities like Bendigo, Ballarat, Geelong, Wagga Wagga, Bathurst, Dubbo, Tamworth and Orange. These are all vibrant economic areas with growing populations, many industries and many opportunities.
“But beware of one-trick ponies with mining towns the obvious example,” he says.