December 6, 2017 - Peak Equities

Getting Started in Commercial Real Estate Investing 2020

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.

 

Commercial Real Estate Investing FAQs

 

What is commercial property investing?

Investing in commercial property means that you are acquiring real estate that has been leased to a commercial business. Unlike investing in residential property, a commercial lease is relatively longer, and the rents are higher. There are various grades of commercial real-estate assets with different risk profiles depending on the investor’s requirements.

Why invest in commercial property?

Investing in commercial property allows you to invest your money in long-term cash flow options with a higher income than many asset classes along with excellent prospects for capital growth. While higher-income is generally associated with increased risk, this risk can be mitigated by undertaking detailed research and choosing the right asset, investment structure and professional advisors.

How does commercial real estate investment work?

To invest in commercial real estate, you will need to acquire the property that has council approval to be used for commercial purposes. You will then need to find commercial tenants who wish to operate their business at your property. Both parties will then execute a commercial real estate lease which will include the rental amount and each party’s contributions towards expenses. In addition to the rental return, the property’s capital value will change as well (this could go up or down).

How to get into commercial real estate investing?

Commercial real estate investing is different to residential real estate investing. With commercial real estate investing you will need to acquire a commercial property. These types of properties might be valued higher depending on the location and the existing owner’s view of the market. These properties also have a different risk profile due to the type of tenants leasing the premises. Commercial properties can range from small corner shops to large warehouses.

How to invest in commercial real estate?

You will need to find a property that has been approved by the local council to be used for commercial purposes. Once you have acquired the property, you may need to make modifications to it to attract high quality commercial tenants. Usually, the property is leased without any furnishings or fixtures and it is expected that the tenant will pay for fit-out and de-fit costs during their tenancy.

What should I know before investing in commercial real estate in Australia?

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.

Is investing in commercial property a good idea?

There is no one correct answer to this question. We recommend you always seek independent financial advice. A suitably qualified accountant or investment advisor is an important resource. This is because the appetite for investing in commercial property varies between people and depends on many circumstances that differ from one person to another.

What is a good ROI on commercial property?

There is no fixed band to determine the ideal ROI on commercial property. There are many types of commercial properties and various factors influence the ROI. This includes the location of the property, the ownership history, goodwill of previous businesses, competition in the area, quality of tenants, length of lease and many other factors.

What are the best types of commercial property for investment?

There are risks associated with all investments and particularly with commercial real estate investing in less than premium assets. Before you consider commercial real estate investment it is important to engage a professional advisor to provide you with a market assessment. The capital growth and rental return of commercial properties will vary, and these properties can be graded into various risk and return classes which differ over time depending on various economic conditions.

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