Mention the word ‘property’ to many Australians, and residential housing often comes to mind. But commercial property is a major investment sector that offers a wealth of advantages for investors.
3 key advantages of commercial property investment
Let’s take a look at the three chief advantages of commercial property investment and exactly how they can benefit investors.
1. The potential for solid returns
Past performance is no guide for the future, however recent data from the Property Council of Australia/ MSCI Australia Annual Property Index confirmed that commercial property has a track record of delivering positive returns.
As the table below shows, commercial property investors earned annual gains of up to 9.4% in the 10 years to June 2021.
Net yields on commercial property are equally impressive, typically in the order of 5.5-7.0%.
Commercial property will typically offer stronger yields than the more growth-focused residential property sector. Please note however that past performance is no reliable indicator of future performance and it’s important to weigh up the risks of any investment.
| Index Performance Property returns June 2021 | |||||
| 1-year | 3-year | 5-year | 7-year | 10-year | |
| All assets | 7.9% | 5.9% | 8.2% | 9.4% | 9.4% |
| Standing Investments^ | 7.8% | 5.8% | 8.1% | 9.3% | 9.4% |
Source: The Property Council of Australia/MSCI Australia Annual Property Index [1] | |||||
2. Long leases have the potential for more stable income
Lease periods for commercial property tend to be far longer than we see in the residential market, often spanning 5-7 years with an option to renew for an equal period.
This has the potential to provide investors with greater surety of income and less of the costs associated with loss of rent and finding a new tenant. This can make commercial property very attractive to cash-flow focused investors seeking regular income, such as those nearing retirement.
3. Fewer outgoings for owners
Unlike residential leases where the landlord is usually responsible for rates, taxes and building insurance, it’s common for commercial tenants to pay many of the outgoings associated with a leased property.
The combination of outgoings paid by the tenant can vary between states and leases. But as a guide, commercial tenants are often responsible for maintenance, council and water rates, and even building insurance.
In short, it can mean fewer ongoing costs, which in turn contributes to higher net yields.
Why a commercial property fund makes sense
Collectively, the potential for strong returns, long leases and fewer outgoings can create a significant advantage to commercial property investment. However, the challenge for investors is that buying a commercial property directly can mean taking on significant debt.
In addition, commercial properties are high value assets. Investing directly makes it difficult to achieve diversification across the commercial sector, as it means you’re generally concentrating a lot of capital and risk into a single asset. Moreover, selecting and managing a commercial property and negotiating leases calls for expertise in order to deliver the best results.
Investing in a commercial property fund can provide the best of both worlds. It’s an opportunity to reap the rewards of a diversified, professionally managed commercial property portfolio without the need to add debt to personal balance sheets.
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