Blog - Commercial
5 CRUCIAL COMMERCIAL PROPERTY TIPS FOR FIRST-TIME BUYERS
Australia is blessed with a booming population that will continue to fuel our economy for decades.
Contributing to population growth are large numbers of migrants, international students and people on temporary visas. This demographic of “youngish” people are spenders, creating demand for our goods and services.
For investors, this creates many opportunities, not least for those contemplating buying commercial property.
Seasoned landlords know that rental returns for commercial leases beat residential tenancies hands down. Commercial rents tend to be higher and for longer periods, with many of the ongoing costs of maintaining the property paid by the lessee, boosting your net rental income. Plus, commercial leases have annual reviews allowing landlords to build in rent increases, generally around 3 per cent a year.
There are, however, a few filters that need to be applied in order to choose a property that will produce a desired return on investment.
Avoid the Commercial Property Vacancy Trap
One of the biggest drawbacks for commercial landlords is that once the property is vacated, it can take longer to sign a new lease than if you were renting out a residential property.
In order to avoid this vacancy trap, it is important to have:
- A reasonable handle on economic drivers
- An idea of the outlook for different sectors
- A sense of a location’s benefits and drawbacks
- An eye for quality tenants
Most listed Australian companies have recently outperformed their own expectations – a good bellwether of economic growth. Some of them will expand their investment and create demand from suppliers of goods and services.
And all suppliers need a premises from which to conduct business. That’s where landlords come in. Depending on which commercial property category is selected, a landlord needs to take different considerations into account.
Logistics Properties: Opportunities Abound in Warehousing
Logistics-related properties, such as industrial and warehouse spaces, need to be located very close to major transport infrastructure so their occupiers can ship in and ship out their goods easily. Similarly, warehouses that have associated office space, loading docks, generous clear span and car spaces will be more attractive than an empty factory devoid of these facilities.
The boom in online retail has produced a sweet spot for owners of warehousing in the past couple of years, as more and more businesses offer their products over the internet. Seamless fulfilment for online purchases requires efficient warehousing.
Retail Spaces: Residential Growth Corridors can Prove Lucrative
Whether it’s investing in a small shopping centre or a space in a high street strip, the key consideration for buying a retail asset is the surrounding catchment of potential customers for your tenant.
Areas where high-density residential projects are going up provide foot traffic that can appeal to your lessee. Associated car parking, whether on or off-street, is another drawcard.
So, too, are areas that are being gentrified as Generation X and Millennials increasingly enjoy dining out and consumers generally seek niche products as an alternative to shopping at the supermarket or mall.
On the other hand, where new suburbs are springing up there are also opportunities for landlords to house franchisees, such as branded convenience stores, pubs and liquor shops, fast food chains and petrol stations. In the absence of a nearby shopping centre, these types of businesses often do brisk trade in growth corridors.
Office Spaces: Location is Key to Successful Letting
Owners of Sydney office space last year benefitted from one of the lowest vacancy rates in 10 years – and the lowest rate nationally – allowing them to increase rents while watching the value of their assets climb.
As with other types of commercial properties, location is key to successfully letting office space. Does the address have good public transport nearby, or at least onsite car spaces for staff?
With a growing desire to reduce their carbon footprint – and utility costs – many tenants are opting for offices that have extra sustainability built into them. Assets that fail to meet this growing requirement are likely to struggle to find tenants in the future, the experts say.
Care Services: Child, Aged and Medical Care are a Safe Bet
Our expanding population is delivering options for investors in the aged and child care, day surgery clinic and medical centre sectors.
The Property Council of Australia says these sectors are more stable because they provide services in the non-discretionary spending world and are, as such, less affected by any economic downturns. They are often a safer bet for landlords, too, because the tenants are likely to be high-profile and more heavily regulated.
These service providers do need specialised fit-outs, however, so if the premises is not already established, you may need to consider the extra capital needed to make the property fit for purpose.
And finally, think carefully about the quality of your prospective tenant. According to the Australian Investors Association landlords should look for a strong corporate or government tenant with a long-term lease. It is important to try and assess if your tenant and their business will be able to continue paying rent over multiple years, to reduce your risk of long vacancies.