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Successful investing in commercial property requires an understanding of the myriad factors that contribute to the value and risk as well as a long-term plan to sustain and add value through strengthening the tenancy mix, extending lease expiry profile or investing in capital expenditure to retain tenants and increasing the achievable rent per square meter of space.
While these factors increase the complexity of the investment consideration in comparison to other asset classes, they also mean that there is value to be captured by undertaking detailed and considered research, planning and investigations.
Bricks-and-mortar retail is going through a period of adaptation as a result of the ongoing growth and lower overheads of the online retail sector. Strip shopping centres are also increasingly making way for large-scale retailers and ‘bulky goods centres’ of the Bunnings Warehouse and Harvey Norman variety. This trend needs to be considered when investing in retail assets.
It is useful to understand this trend in the context of the risks and opportunities it creates. Strategies to mitigate these risks include learning as much as possible about the trading strength of tenants in an immediate area, tenant retention and turnover rates and levels of foot traffic at different times of day. The presence of a strong national brand ‘big box’ anchor tenant can also be a positive indicator of strength.
Industrial spaces can offer flexibility as mixed-use premises. With a shift from manufacturing activity to storage and distribution, and in some instances, research and development space, industrial buildings configured, zoned and fitted out in a way that supports multiple uses can lower the risk of vacancy therefore increasing the security. For those looking for a safer long-term investment, a flexible facility – one that can be easily configured to accommodate its tenant’s expansion or different office space configurations – is a good option.
Given Australia’s robust services sector – the growth in popularity of co-working office spaces, and the ongoing repurposing of office space for residential developments – demand for commercial office space is expected to remain strong in the foreseeable future.
With technology allowing people to work and collaborate from nearly anywhere, location (while still critical) should no longer be the sole consideration for real estate investment, as people choose to work closer to home, rather in dense central business districts. Younger participants in today’s workforce tend also look for ‘smart’ buildings with enhanced features and amenities. Key attributes to consider for these kinds of assets include parking and public transport access, sustainability in design and fittings, local eateries, coffee and amenities, superfast internet speeds, views and surrounding properties.
As with any investment, there is an element of risk that is usually positively correlated with returns. Commercial real estate can provide higher returns than other classes relative to the underlying risk on the basis that the risk is driven by the complexity of owning and managing such assets, rather than the underlying market or income volatility.
With expert asset selection and management, commercial real estate can offer enhanced returns and capital growth as well as significant tax and depreciation benefits.
At Peak Equities, commercial syndicate investments deliver strong monthly income. With the company’s focus on security and conservative capital growth, the historic total annual average return to investors has been in excess of 11%.
Income security is an important consideration in investment decisions (particularly for superannuation funds which rely on recurring income), commercial real estate investing can be more attractive than residential equivalents as longer lease terms and stronger underlying guarantees mean that, in the context of an economic downturn, owners can continue to enjoy the same income level through the cycle.
“Unlike residential property, commercial property is generally still there performing for you, even if the economy does slow down. However, when the economy performs well, commercial property grows in value and provides steady income; it places operators in far greater control over the outcomes of their investments,” says Michael Yardney in Property Update.
In an uncertain economic and global political climate, diversifying investments across many different asset classes and types is a prudent measure to lower overall risk. “Real estate is no exception,” declares Yardney. “In commercial real estate, there’s almost no limit to what to invest in or where to invest. And investing through a real estate investment trust means a great deal of support in terms of information and advice.”
Taking advantage of the research, insights and experience of professional commercial property syndicators can further lower risk by avoiding mistakes, missteps or miscalculations.
There’s no one-size-fits-all approach to investing in commercial property. While there are general factors to consider in all cases, every asset has its strengths, weaknesses, opportunities and threats based on a variety of factors.
The strategies employed by a real estate investment trust (REIT) should be anchored in data and rationality – the strength of an investment is judged according to extensive criteria including but not limited to location, asset class, market trends as well as an intimate understanding of the tenants, the strength of their business as well as their market sector in general.
These complex and multifaceted considerations can be beyond the capability of all but the most experienced private investors. For this reason, it can be prudent to leverage the expertise of a professional investment advisor or financial planner.
September 19, 2019