No-one goes into the investment property market to deliberately lose money unless they have some shady tax haven, so it goes without saying that the goal for the investor is to increase their wealth. Most independent investors in Australia who are looking to build an investment portfolio of any size generally start first with residential property, and there is nothing wrong with that strategy. This leaves the commercial real estate market like in Macquarie largely to the biggest players, and there are very good reasons why they are there – to generate maximum return on their investment and make a profit.
The commercial real estate market is made up of a very diverse group of properties. Generally they include industrial facilities, office buildings, retail outlets, warehouses, single shop buildings and others. The main difference between these properties and residential real estate is that they are leased out to tenants as a workspace rather than for somewhere to live. Like any business enterprise, there are advantages and disadvantages to holding investment dollars in these properties.
The biggest advantage of commercial real estate is the leasing rates which generally perform strongly over time, especially in areas where commercial use land is in short supply. They also generate substantial monthly cash flow, and are leased over a much longer period of time than residential. This gives the investor stability over their cash flow, as most leases are at least twelve months, and some run for as much as 5 to 10 years.
In commercial property, the leasing rates are usually calculated as price per square metre, and boom and bust cycles aside, CBD properties generally lease at a much higher price than those in the suburbs. Industrial buildings usually lease at a lower price per square metre, but the upside is that the overheads for these type of properties are usually not as high as, for example, an inner city office tower.
The regulatory framework in which these premises are required to operate is the biggest disadvantage. Local government by-laws and zoning, occupation health and safety regulations and environmental laws are just some of the legal processes that must be negotiated and complied with. The next issue that can cause problems is that each tenant will have very specific requirements so that if tenant turnover is high, there will be a lot of expense involved in refurbishing the premises to suit.
Residential real estate is an attractive investment because most people already understand how housing investment works. Commercial real estate is very different, and requires specialised knowledge, or staff members on the payroll who have those skills. This suggests that the ideal commercial investor would be someone who is already quite wealthy. It is not suited to the Mum and Dad investor who wants to build up some retirement income but without any hassles.
Large superannuation funds are among the biggest investors in commercial property. With the baby boomers now approaching retirement, and their investment portfolios stuttering back to life, their hope is that commercial property will perform well enough to claw back some return into the superannuation funds.
