Many investors are familiar with the strategy of diversifying their assets and spreading their wealth (and consequently risk) across multiple investment vehicles. When it comes to property investment, savvy investors recognise the need and the role commercial property plays alongside an established residential portfolio; however, given the usually high cost of acquiring commercial property, few investors have the financial capability or appetite to add multiple commercial investments to their portfolio. This prevents investors from realising the benefits of growth and risk mitigation that come from investing across multiple industries and asset classes.
Why diversification is important in your wealth creation strategy
Commercial property investment continues to play a crucial role in building a successful property portfolio for savvy investors as net yields for commercial property are typically between 6-8%, compared to residential of between 3-4%. However, commercial property generally experiences lower capital growth compared to residential and can be heavily impacted by economic factors influencing industry segments. Longer vacancy periods, higher interest costs and higher deposits are all factors that can present significant risk factors to investors who may only be exposed to one type of commercial property.
Often, there can be significant differences in performance across the industrial, retail, office and medical sectors, with each segment subject to unique market factors at both state and national levels. As an investor, spreading your capital across different assets and industries can therefore help to build more risk mitigation into your portfolio, while also leveraging growth opportunities across different sectors.
Alternative ways to access commercial property
While a diverse commercial property investment strategy is attractive to many investors, with quality commercial assets generally costing at least $2 million and with many high-quality assets costing significantly more, this may not be a viable financial option for everyone.
Commercial property funds, also referred to as commercial property syndicates, can be considered by investors as an available and logical means to access investment across various commercial segments as they can have the added advantage of an experienced, and hopefully proven, acquisitions team and professional asset management which can better ensure optimum return rates.
When approached correctly, commercial property is a valuable asset in a successful investment portfolio and can provide cash flow security. Like any investment, there are several factors that must be considered before deciding if it is the right strategy for you and your goals, and professional advice for your situation should be obtained before making any decisions.