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Investing in commercial property – the viable alternative

When it comes time to invest in Real Estate, you need to make a few basic decisionswith regard to where to invest your hard earned dollars. Whilst many of us have purchased residential property before, a much smaller percentage would understand commercial property. Leading commercial real estate agents, King & Co, looks at the main advantages and disadvantages of investing in the commercial property market.

When investing in this sector of the market there are a few distinct differences to its residential counterpart. Some of the main differences are:

• the price of an entry-level property is generally higher in non residential;

• the tenancy profile and lessee’s (tenants) responsibilities can vary greatly from residential and, finally;

• yields (income returns) are generally higher than residential.

Whilst the average price for a transaction in the Brisbane industrial market in 2006-2007 was a little over $1,000,000 (King and Co property research) there are still properties available to purchase from around $ 250,000. These are typically small units in strata title developments, which can be found dotted across Brisbane and adjoining shires and primarily service the small business owners, or those wishing to use the units as purely storage.

The other end of the scale is freestanding warehouses, typically built from concrete tilt panels which service medium to large businesses.

Typical lease terms in the commercial and industrial sector range from 3 to 7 years and almost always will have an option for the lessee to continue, providing they have not broken the terms of their original lease. Leases of this length allow both the lessee and lessor comfort and security. Compare this to residential property where tenants generally only sign a 6-12 month lease.

In an industrial or commercial lease, the lessee is usually responsible for the upkeep of the property (excluding structural repairs), including lawns, gardens and security. Typically, a lease will also have a “make good” clause, which requires the lessee to repaint and recarpet when vacating, and to also pay for Council rates, property management and insurance. Again, compare this to a residential investment.

As with any style of property investment, it is worthwhile speaking with a finance professional in the first instance to establish your budget and understand the expectations of lenders. Generally speaking, mainstream lenders prefer to maintain a LVR of 70 - 75 % for this sector, however rental yields for industrial and commercial investments are substantially higher than that of residential and currently range from 6% to 8% in the Brisbane Metro area depending on a property’s age, condition, lessee quality and location.

In summary, the benefits of owning non residential property, whether it be as an investment or for your business to occupy, can be very rewarding, but, as with any investment, it requires you to do some preliminary research and ensure you get a balanced view from your respective financial, legal and property advisers.

This article was written by Gregory Woods of King and Co Property Consultants, who can be contacted on g.woods@kingco.com.au

Greg Woods MBA, JP
Investment Sales
King & Co Property Consultants
99 Annerley Road
Woolloongabba QLD 4102
Mob: 0409 305 224
Direct: 07 3011 0842
Ph: 07 3844 3222
Fax: 07 3844 9888
www.kingco.com.au