5 reasons why investing in commercial property is beneficial

The Australian retail market could look very different in a few years.
The Australian retail market could look very different in a few years.

To those who’ve never stuck a toe in the commercial property investment pond, the idea can appear complex, expensive and downright daunting.

But getting into the commercial property market – which includes any kind of real estate used for a business, from cafés and retail stores to car parks, warehouses and even doctor’s office – can be lucrative when done right.

Among the reasons why buying a commercial investment property can be a good idea are:

  • Portfolio diversification
  • Longer leases
  • Higher returns
  • Superannuation benefits
  • The tenants look after it.

Portfolio diversification

Andrew Crossley, property investment strategist and founder of Australian Property Advisory Group, says the first reason to invest in commercial property is portfolio diversification.

“Whilst you can diversify in residential property – such as houses and units, metro, CBD, regional, capital growth and cashflow – it is still all in the consumer market. Commercial property allows you to invest in different markets and different industries, such as manufacturing and retail,” he says.

Longer leases

One of the biggest differences between residential and commercial property investment is the length of the leases. The longer agreements used in commercial deliver a steady income when the property is tenanted.

While residential leases can run for just a year, commercial leases are generally for a number of years, with an option to extend in three or five-year increments.

Crossley says this translates to a more reliable income for the investor and less hassle all-round when compared to re-letting and dealing with different people every 12 months.

Commercial tenants tend to remain longer than residential ones.

Higher returns

Higher rental income is also an attraction of commercial property investments. The tenant generally covers all outgoings, in addition to the rent.

This means the tenant pays for the rates, insurance, body corporate and any other property ownership costs, other than land tax, which apply to the commercial property. The cost of preparing a commercial lease may also be the responsibility of the tenant and this generally results in a much higher yield to the owner, Crossley says.

Then there’s the higher overall yields, when compared to residential property.

The average gross rental yields for residential properties across Australia’s capital cities are currently 4.1%, according to CoreLogic RP Data. In contrast, it’s not uncommon to get anywhere between 6% and 10% gross rental yield for commercial properties.

Crossley says there can be greater risk with commercial property, so higher rental yields are required to justify investing.

Superannuation benefits

Many investors buy property through their self-managed superannuation fund, but it is against the rules to live in a residential property purchased this way. Commercial property, though, is treated differently, Crossley says.

“While you can’t live in in a residential property if it’s in your self-managed superannuation fund, you can work out of your commercial property, if it is in your self-managed superannuation fund,” he says.

This is appealing to investors who also run businesses.

Commercial tenants maintain the property well, as it’s their place of business.

Tenants look after the property

Another benefit of commercial property investment is that tenants will generally maintain the property in top condition, as it is important to their business image, staff and customers.

“Compare this to a residential investment. The landlord of a residential property has to ensure the property is presented at its best in order to attract a tenant, and the costs of any improvements are generally at the hand of the landlord,” Crossley says.