Getting Started in Commercial Real Estate Investing
Commercial property investment in Australia offers higher income than many asset classes along with excellent prospects for capital growth. Whilst higher income is generally associated with increased risk, this risk can be mitigated and your prospects of success increased by undertaking detailed research, and choosing the right asset, investment structure and professional advisors. Here is a basic guide to getting started.
Define your investment profile and expectations: Depending on your stage of life, income requirements, living expenses, financial goals and current portfolio balance, the kind of commercial property investment that best suits your needs will vary. A licensed financial planner is best placed to help define your requirements and strike the right balance of income, growth prospects, time horizon and risk.
Always seek independent financial advice: A suitably qualified accountant or investment advisor is an important resource.
Avoid B or C grade assets: There are risks associated with all investments and particularly with commercial real estate investing in less than premium assets. The value of B & C grade assets can be more volatile and sensitive to vacancies, harder to fill with new tenants and can also require significant capital expenditure, repairs or maintenance. While the investment yield offered with B & C grade assets can be particularly attractive, the risks to both income and capital are considerable, and accordingly, investing in assets of this kind is not recommended for anyone but the most experienced commercial real estate investors.
Undertake a thorough due diligence investigation, with the assistance of experts in each field of enquiry. This should include the following elements:
- Instruct a qualified Quantity Surveyor to report on the condition of the building: Look for structural issues, the condition of air conditioning and heating services; hydraulic equipment (elevators), and fire services equipment. If capital expenditure is required in any of these areas, it can materially affect your income and the value of your investment.
- Get to know your tenants: The security of the income stream associated with a commercial property is intimately linked to the quality of the sitting tenants. The more you can learn about them, the sector they are in, their trading history, general business health, any history of rental arrears and future intentions, the more secure your investment will be.
- Engage a Solicitor to carefully review the leases and the contract of sale: Accurately modelling cash flows and your ability to service bank interest and other property expenses and requires a detailed understanding of the terms of current leases, treatment of outgoings expenses, annual rent increases or reviews, market rental levels as well as any current or expected future rent abatements or incentives.
- Learn all you can about the local area: Research local market conditions, vacancy rates, net absorption history and forecasts as well as comparable rentals and recent sales history for similar assets. This information will directly influence the medium or long-term income prospects for the asset and its future value. Be particularly mindful of the level of incentives required to attract or maintain tenants in that location.
- Obtain an independent valuation of the property: This will be required in any event by your lenders;
- Ensure that insurance policies are in place and comprehensive;
- Have Town Planning consultants advise you with respect to zoning and any constraints on the site;
- Engage a Land Surveyor to confirm the dimensions of the site and the building;
Diversify: Diversification is a critical element to minimising risk and. Your investment decisions should be made within the context of your existing investments and investment profile. Balancing a portfolio includes consideration of your exposure to each major asset class as well as the spread of investments within each class.
Choose your fund manager wisely: If you lack the resources or expertise to undertake the above pre-acquisition activities, you should consider investing through participation in a Managed Fund / Property Syndicate. In that case, the most important decision to make is choosing the right fund manager. It is recommended to make inquiries with at least 3 reputable fund managers and to assess their track record, performance history, investor feedback and reviews as well as quality and regularity of reporting and communication.