How commercial property investment could benefit your portfolio
No matter what type of investments you have, managing risk is a critical part of prudent wealth building.
For example, if you’re a business owner you might ensure you have a selection of suppliers to call upon, in case one is unable to fulfil an order at any time. Or, if you’re a service supplier, you might focus on diversifying your customer base in case one segment is impacted by factors outside your control.
It’s the same for property investments. Adopting this diversity mindset could offer you some level of protection in the event of fluctuations in the property market.
Commercial property is not nearly as popular an investment option as residential, however it does have some unique selling points that could help balance your portfolio.
Firstly, although the commercial market has seen less growth in recent years, it has also avoided a market correction. So, it could be viewed as far more sustainable in terms of long term growth.
Secondly, while residential investors enjoy higher capital growth, commercial property tends to deliver higher rental returns. It’s not unusual for commercial property rental returns to be in the region of 4%-10% per annum – far stronger than those typically found in the residential market.
What to consider when investing in commercial property
Residential property is all about location, location, location and commercial is really no different. Make sure it’s close to transport hubs and regional services. A well located property will appeal to more potential tenants should the tenant vacate.
If there is an existing tenancy in place, check the quality of the tenant. Look at the length of time they have been leasing the property, their payment history and the amount of time left on the lease.
If the property is vacant, or there is not much time left on the lease, do your research into how easily it can be re-tenanted. It is not uncommon for commercial properties to be vacant for extended periods – sometimes 12 months or more.
4. Alternate Use
A commercial property’s potential uses and appeal may be restricted by the type of structure on the land and the current zoning. Always choose properties that could suit a number of different industry types. This gives you more options with tenants and makes the property more marketable.
Also keep an eye out for industrial/commercial property on the CBD fringe that may be primed for gentrification. The current zoning may not allow residential conversion but if you’re patient, rezoning may increase the value of the property as a potential residential development site.
Taking your first steps into commercial property investment can appear daunting, but it could help mitigate risk with your property assets. If you’re not sure, consult your accountant, commercial agent, property valuer or adviser to work out whether it’s the right move for you.
John Kolyvas, National Partnership Manager, Commercial at ING DIRECT Australia.
Naritas is an accredited introducer partner for ING DIRECT commercial loans. To get started with an ING DIRECT commercial loan using Naritas, click here.