Commercial Property 101: Not happy with residential property returns? Try commercial property

Invested in residential property, but a little frustrated with a 'steady' 3-4 percent return?

It might be time to consider the time-tested strategy of diversifying your portfolio and invest in commercial property.

As the heat comes out of the housing market, particularly in Sydney and Melbourne, and expectations of continued softness in the January Core Logic RP Data home price indexes, investors could make a beeline for commercial property.

The search for better yields by investors could benefit commercial property and infrastructure, says AMP Capital chief economist Shane Oliver in its latest weekly update.

Reinforcing the view is the outlook that cash and bank deposits are likely to provide poor returns, with term deposit rates running around 2.5% and the central bank expected to cut the cash rate to 1.75%.

Raine & Horne Commercial’s executive chairman Angus Raine noted late last year that, “low cash rates were helping the smart money find its way into commercial real estate”.

A Commonwealth Bank report said late last year that Australian commercial property sales was set to break the $20 billion benchmark for a third year in a row.

Here are a few reasons why it might be more bang for your buck.

First and foremost, the prospect of higher returns.

Capital city rental rates recorded their slowest annual rate of growth (0.3%) in the 12 months to November, latest Corelogic RP data shows. Growth rental yields also fell to 3.5%, the data showed.

For commercial property, 8% to 12% gross rental yields are not uncommon, according to a blog post on www.realestate.com.au.

Commercial property also offers more options such as office space, industrial, retail, hotels, rural and agribusiness, healthcare and retirement living, meaning it can fit in with most investor needs and risk appetites.

Commercial properties also score on tenancy periods, with contracts typically between three to 10 years, translating to a stable income stream and also less risk of defaulting tenants. For residential property, a lease agreement could be as short as six months and if not renewed, it means the search for new tenants again.

Also, commercial tenants usually pay all the outgoings for you, unlike a residential property, where the landlord is liable for paying council and water rates, maintenance etc.

Square metre for square metre, commercial real estate is often cheaper than residential property but because you’re buying more square metres per property, commercial is usually dearer in real terms. 

On the flip side, vacancy rates are generally higher for commercial, sometimes months or years before a retail space or office is taken up by tenants unlike a house or unit, which typically rent out within weeks. 

Economic fluctuations also impact commercial properties more as businesses rise and fall, hurting demand.

As with any investing, buying commercial property calls for thorough research, best summed up by hotspotting.com.au founder Terry Ryder. 

"Research is the foundation of all successful investment strategies. It takes time and if you don’t have the time, you need to be willing to spend money buying good research."

“We’re seeing plenty of activity in industrial and retail markets priced below $5 million, with assets priced between $1 million and $3 million very popular with yield hungry, self-managed super funds,” said Angus Raine, executive chairman, Raine & Horne Commercial said recently.

“Low cash rates are also helping the smart money find its way into commercial real estate, which is producing some good sales results for vendors.”