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.
In today’s low-interest rate environment, plenty of Australians are looking for investments with the potential to earn regular income returns – and commercial property can tick plenty of boxes.
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 the latest Property Council of Australia/ MSCI Australia Annual Property Index, confirms that commercial property has a track record of delivering positive returns.
As the table below shows, commercial property investors have earned annual gains of up to 9.4% over the last 10 years.
Net yields on commercial property are equally impressive, typically in the order of 5.5-7.0%. With alternative investments such as term deposits taking a hit given record low interest rates, that’s considerably more than investors will earn on cash sitting in the bank.
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 |
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| 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% |
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Source: The Property Council of Australia/MSCI Australia Annual Property Index [1] |
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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 gives commercial property investors greater surety of income with 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.
This are considerable advantages to commercial property investment. In short, it means fewer ongoing costs, which contributes to higher net yields, with less drain on an investor’s cashflow.
Why a commercial property fund makes sense
Collectively, strong returns, long leases and fewer outgoings 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, thereby lowering your risk profile. 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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