4 reasons commercial property should be on your to-buy list

But while residential properties remain the apple of investors’ eyes, Maria Milillo, the business support manager for property management at Raine & Horne, offered that commercial property can also make “excellent sense” as the next addition to one’s property portfolio. 

Here are four reasons why investors should consider a commercial property:

1. Investment diversification

Commercial properties have characteristics and behaviour that are largely different from residential properties in many aspects, making it the perfect choice if you’re looking to diversify your portfolio.

Ms Milillo explained that the right mix of residential and commercial properties could help portfolios adapt to the shifting needs of investors throughout their investment journey.

“When combined into a diversified property portfolio, these differences can also support the evolving needs of sophisticated investors as they journey along the investment yellow brick road,” she explained.  

2. Strong income returns 

For most investors, getting strong income returns on their investment is a top priority. And according to Ms Milillo, commercial property brings this particular advantage to the table. 

“One of the benefits of owning commercial property is that leases usually run for much longer than residential property — in many cases, three to five years and longer. 

“These more substantial leases provide more certainty of income and generally higher yields than many other asset classes,” she stated. 

To add weight behind her argument, she cited the latest Raine & Horne Commercial Insights report, which revealed that commercial yields are currently ranging between 4 to 6 per cent (and in some cases higher) depending on the property type and location.

For comparison, she cited a separate report from a property data provider.  “On the other hand, CoreLogic says gross (before costs) yields on residential housing nationally are 3.2 per cent for houses and 3.9 per cent for apartments,” she said.  

3. Benefits your small business

If you own a small business, purchasing a commercial property can also offer significant value. 

“Investing in your business premises offers the security of tenure plus a chance to control leasing costs,” Ms  Milillo said. 

She stated that with interest rates at historical lows, there is an observed increase proportion of owner-occupiers in commercial property markets.

Ms Milillo also underlined the cost-benefit of owning commercial properties rather than renting one for your business. “In truth, it is now cheaper for SMEs to own rather than lease their place of business in many areas,” she said. 

4. Lower ongoing costs

Lastly, Ms Milillo noted that being a landlord of a commercial property is more cost-efficient compared with overseeing a residential property. 

“The landlord wears many ongoing costs in a residential tenancy, including repairs and maintenance. Managing these expenses can be a nuisance, lowering the landlord’s net (after costs) yields,” she explained.

By contrast, Ms Milillo pointed out that it is more typical for the tenant to shoulder the majority of the property’s regular expenses in the commercial market. 

“This means more of the rent hits the landlord’s pocket. Better still, the extra cash flow allows the landlord (a ‘lessor’ in commercial real estate) to reinvest funds to keep the shop, industrial unit, or office in good working order,” she said.