December 6, 2017 - Peak Equities
Category : Blog
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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:
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.
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.
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.
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).
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.
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.
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.
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.
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.
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.
September 19, 2019