Investing in Commercial Property

Commercial property provides a higher net yield or cash flow than residential property. Long term leases from commercial property provides security of income, as does owning a multi-tenanted property.

Potential long vacancy periods should your tenant vacate. Increased costs for securing a new tenant with lease fee’s and incentives. Commercial property leases are complex causing inexperienced investors to misunderstand and therefore calculate the projected net yield incorrectly.

Higher net yields/ cash flow, longer lease terms, longer vacancy periods, more exposed to the economy and business conditions. The value of a commercial property is centred around the properties potential net income, therefore less emotional and subjective than residential property.

Specialised commercial asset classes include: Office, industrial, retail, medical, fast food, service stations, child care centres, self-storage and student accommodation.

Freehold is owning the land and the building. Strata you own a portion of the land and have limited control in the use of the land/property.

best to take advice off your accountant, however, typically a client would hold the property in some form of trust structure.

Economy, interest rates or borrowing capacity all have an influence on demand. Infrastructure projects, demographics and zoning/development potential can increase demand on a micro scale, i.e. location specific.

The rent and outgoings paid by tenants needs to be scrutinised against current market rates. It’s important these rates are in-line with market.

Understand the true WALE (Weighted Average Lease Expiry) of the property.

Like residential property, the condition of the property should be reviewed by a professional building consultant. Ideally, a property should have a point of difference above other competitive properties in the same market. An assessment should be made on how easy it would be to secure a new tenant should the existing tenant vacate. It is important that an investor focuses on the fundamentals of the property and not who the current tenant is. Tenants can come and go however a property with the correct fundamentals will ensure the property is leasable. This is what you are seeking with a commercial investment.

Review the lease or leases to ensure they are well written and structured. Too often leases are grey and in most cases this creates a problem down the track.

Typically through a broker or a Bank.

A professionally prepared lease by a solicitor is recommended. The lease needs to be well structured with no loop holes for the tenant to terminate the lease or not pay rent. The payment of rent and recovery of outgoings needs to be clear and concise, not grey.

Be patient, make sure the fundamentals of the property are sound, make sure all the values (ie. rent, outgoings, capital rate etc.) are within market range. Ideally purchase a property with a long WALE. Be thorough in the search for a property and know as much as possible about the market. Be thorough in the due diligence and leave no stone unturned. Work out a negotiation strategy before commencing negotiations. If an investor is inexperienced or lacks confidence, seek the assistance of an expert as commercial property can be very expensive if you make a mistake when purchasing.

Over paying for a property, under valuing a property and missing out on opportunities, not executing enough due diligence, not exposing themselves to all the opportunities in the market, not being able to calculate the true net income and net yield, purchasing a property which is too specialised and hard to attract new tenants once the original tenant vacates and buying a property with the belief the tenant won’t leave.