Should You Invest in Commercial Real Estate?
When it comes to investing in real estate, most of the attention tends to go to the residential real estate market. However, commercial real estate can also provide a lucrative investment asset with high returns and long-term security.
Like the residential market, commercial property covers a broad range of prices and locations, but with a great deal more scope when it comes to asset type.
Investing in commercial property can be a smart move. However, it has some distinct differences compared with the residential market. So, if you’re new to the commercial market, we have some valuable information to help you decide if commercial property is the right investment option for you.
What is commercial real estate?
In short, commercial property is anything that’s not residential property or vacant land.It can vary is size and scope from a garage or corner store to hotels, shopping malls or CBD high rise buildings.
In broad terms, there are four asset classes: office, retail, hotel and industrial.
Office real estate is made up of buildings in either an urban or suburban area. Office buildings may be stand-alone or grouped together as an office park. Office real estate can vary greatly, ranging from CBD skyscrapers to smaller, more unassuming office buildings. As with residential property, location is crucial. Office space in the Melbourne CBD will be much more expensive (and lucrative) than office space in Bendigo or Ballarat.
Retail real estate refers to commercial property that is designed for retail businesses, such as shopping malls, department stores, small stores and big box franchises and chains like Bunnings. This is one of the more versatile types of commercial property. Retail property requires high levels of foot traffic and transport accessibility to be successful.
Industrial real estate includes factories for manufacturing, warehouses, transport depots, dock areas and so on. Industrial real estate is typically much larger than standard commercial real estate due to the increased needs for property with this type of commercial real estate. It is often located away from residential areas and city CDBs.
Challenges of investing in commercial property
Before investing in commercial property, it’s useful to understand how the commercial market is different to the residential. While commercial property is isn’t necessarily more expensive than residential, it can be more complex and a little riskier for first-time investors.
These are some of the ways that commercial property investment differs from residential:
- The purchasing process is more complex than residential property
- More research and expert industry knowledge may be required
- Securing finance can be more difficult
- Longer vacancy periods between tenants
- Complex leasing conditions and contracts
- Property values are linked to business confidence and broader economic conditions
- Major repair and maintenance work can be costly
Benefits of commercial property
While the commercial market can be trickier to break into and more complex to manage, there are also some distinct advantages of investing in commercial real estate over residential.
- Higher yields
- Better cash-flow
- Longer term leases
- Wide variety of asset choices and price points
- Tenants pay for outgoings (such as council rates, property management etc.)
Whether you’re a seasoned investor or a first-timer, it’s essential to talk to the experts before taking the dive into the commercial property market.