Finance

Why savvy investors are gravitating towards commercial property

- July 21, 2021 3 MIN READ
commercial property can be a good investment

When most people think of property investing, residential is still by far the first thing that comes to mind. However, this isn’t necessarily the smartest move. Seasoned investors have long been privy to the sheer benefits commercial property has to offer with many only interested in commercial as they build a portfolio, writes property investment expert Scott O’Neill.

Why commercial property investment makes good sense

The Returns

In short, commercial property currently offers the highest cash-flow you will find in Australian real-estate. We’re currently seeing 6-9% Net Yields on the commercial properties we buy for our clients. However, when you look at the returns on your initial cash investment, the numbers are even better. We’re talking 25% to 40% cash-on-cash returns – something we’ve not seen since, 2012. NB: Cash-on-cash returns are how investors measure the success of their investments. In short, the super high rental yields found in commercial property mixed with leverage and growth on the assets produce returns that just cannot be matched elsewhere.

Protecting Your Wealth

For HNWI’s and fund managers, protecting their wealth is as important as generating a superior return. When a client comes to me with any sum of money to invest, the last thing they want to think about is taking an unnecessary risk that could lose them money. And this is where commercial property really comes into its own. Unlike shares, cryptocurrency, or other volatile asset classes, commercial property is a physical object, with a notable tenant running a reputable business. The extra security in commercial property is actually the tenant itself and that’s why it’s imperative to get a strong one. A secure tenant who’s been at the premises for a lengthy amount of time and/or who’s built up a certain amount of goodwill with a returning client base is priceless. As you can see (when you know what you are doing), commercial property represents a safe opportunity to invest smarter than the average person.

Neutralising The Risks

Not all commercial asset classes are created equal. For instance, office space in Melbourne’s CBD would not be viewed as secure as a Medical Centre in the suburbs of Melbourne. Luckily, COVID-19 has shined a light on exactly which asset types are performing the best and this allows us to manoeuvre around the risks in the economy (like CBD office space), and target the opportunities, (like freehold medical assets). Knowing the rules and operating out of the dark, in conjunction with a positively geared strategy, means even more security for our high net worth clients, and more reasons for them to invest in the lucrative world of commercial property.

Reep The Rewards

When you get it right – a high-quality asset with a strong, secure tenant – it’s likely this recipe will far exceed anything you would have known in the residential world. And HNWI’s understand this; that your reward will be a secure, long term investment that produces a high-cash-flow and after you’ve paid your loan in full (some high-quality commercial assets can be paid off in as little as ten years time), a passive income straight into your pocket. As a HNWI, with more money to protect, commercial property is an incredibly appealing investment.

Commercial Is The New Residential

I’ve found that almost none of my HNWI clients are interested in residential property anymore. Besides having a house to live in of course. The main reasons why HNWI’s are turning to commercial over residential is that:

Yields are incredibly poor in residential property, especially for the higher value properties. If you purchase a $5 million property in a suburb like Double Bay, Sydney, you’d be lucky to secure rent over $1,800 per week. This represents a 1.87% Gross Yield! Out of that you then have to pay rates, water charges, maintenance, possibly strata, land tax, rental management and there might also be potential vacancies. In summary, the cash-flow return is not good enough to look at twice.

A $5 million commercial property, on the other hand, would return you a 7% Net Yield, (or a $6,730.77 per week net income!). There are no maintenance, strata, rental management, council rates or any other costs because the tenant pays them for you!

The numbers speak for themselves and if done right, investing in a high-quality commercial asset can mean taking advantage of all of the pros without the cons. This can be an absolute game-changer.

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