May 4, 2023 - Peak Equities

Advantages & Disadvantages of Commercial Property Investment

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In recent years, investor confidence in the commercial real estate sector has witnessed a surge, with commercial property investments seeing an upward trend. While 2022 proved to be a boon for Australian investors, with property interest rates increasing regularly, 2023 is expected to carry the momentum forward.

And the reasons are not difficult to fathom. The diversity of asset options for investors in the commercial real estate domain provides a cushion against inflationary pressures while allowing portfolio diversification. This, coupled with the traditional attractions offered by commercial properties, ensures this sector still holds its lustre. However, real estate investment is not devoid of shortcomings, and the commercial domain will challenge investors to adjudge a clear winner.

Advantages of Commercial Property Investment

Let us begin with the numerous benefits investors can look forward to when investing in the commercial property sector. It’s not without reason that despite the waggeries of inflation, interest rate hick-ups, and the impact of the pandemic, this has remained an investor’s go-to option for long-term financial sustainability.

Higher Return Prospects

The most lucrative reason for investors to consider commercial property investment is the high-income yield that this sector promises. Compared to residential real estate, the returns grow manifold over the years, rendering commercial real estate more bankable.

The annual return on the purchase price of a commercial property ranges between 6% to 12%, whereas the figures drop significantly for residential real estate ranging from 2% to 5%. Depending upon the location, investors can look forward to an exponential rise in income as the ecosystem develops and traffic increases.

Longer Lease Periods

Commercial property is more expensive than its residential counterparts. They are valued higher than residential real estate. Investors have a long-term vision when financing these properties, and the lessee is also in it for the long term. This means all commercial property contracts are multi-year deals that assure a steady flow of rental income for years.

Property owners who are able to attract large-scale institutions, corporate giants, government bodies, and business houses can look forward to decade-long leases and financial stability. Partnering with such elite tenants also accentuates the credibility of the property owner, thereby creating a substantial brand value in the market.

Portfolio Diversification

Commercial property investment allows property owners to diversify their funds and focus across varied asset segments and geographic locations. This not only enables them to explore attractive investment options but also hedges their financial risk.

The commercial real estate sector is very vast, and interested players have the opportunity to explore different commercial assets. From retails to office spaces and warehouses to shopping complexes, asset diversification ensures all your eggs are not in one basket and returns are maximised despite rough times.

Lower Maintenance

Your lessee has rented your property to conduct business. This means, along with the product and services on offer, the tenant must maintain the property in order to attract customers and keep their brand name intact. This feature takes a lot of burden off the property owner, as the tenant takes the regular maintenance responsibilities.

A Blue-eyed Customer for Banks

Commercial property involves heavy investments, long-term commitments, and regular interest payments. If things work as expected and a property owner manages to tick all the right boxes, the lending financial institution opens further avenues for the property owner.

A clean track record allows banks to have trust in the property and pitch more lucrative assets to the owner. The long-term cyclical impact of such an arrangement ensures a win-win situation for both the bank and the borrower.

Commercial Property Syndication

Disadvantages of Commercial Property Investment

The Australian commercial real estate scenario has been rewarding for investors. This has resulted in buoyancy and exuberance among both property owners and tenants. While we have mentioned above the lucrative opportunity presented by the commercial real estate sector, investors must consider a few issues to make a more informed decision.

Heavy Initial Investment

This factor often deters investors from opting for this sector. Commercial real estate attracts significant capital expenditure depending on the geographical location, population demographics, and the type of property. However, expert property syndicators like Peak Equities help you manage the size and management complexity of an asset.

With a proven track record and a team of skilled property syndication experts, we at Peak Equities ensure that you invest in nothing but the best in the market. Sustaining your brand worth, ensuring steady wealth generation, and fostering long-term commitments is the cornerstone of our company. We go the extra mile to address the unique nuances of each client.

Complex Legalities

Commercial property leasing involves multiple legal formalities and official clutter that might deter potential investors. Commercial investors must work closely with their legal team to iron out irregularities and provide transparency and clarity to the lease agreement.

Property Management Woes

Traditionally, commercial units are housed in large commercial complexes or business zones. This creates multiple layers of accountability for the owner and the tenant, who might have to engage with several authorities to get things done. This multi-channel communication might delay maintenance work, quick repair tasks, or other operational activities on a day-to-day basis. However, protocol shenanigans ease out as time progresses, resulting in faster response times and better services.

The Way Forward for Commercial Property Investment

There is no denying the fact that commercial real estate has massive potential and a bright future. As income levels rise, the demand for more comprehensive options will arise, creating market value and business potential. Partnering with the right syndicator will help Australian real estate stakeholders to grab a larger share of this attractive and financially lucrative pie!

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