New to commercial property investment? Here’s what you need to know

While the residential market has been in a downward cycle this year, commercial real estate values have remained remarkably resilient and look poised to maintain their strong performance into 2023.

If you have been thinking about getting into the commercial property market, but are not sure where to start, this article aims to provide some guiding principles to help you set off on the right track. 

Keep reading to learn some helpful tips on what to consider when getting into the world of commercial property investment.

Why should I invest in commercial property?

The residential and commercial property investment markets are two fundamentally different things. They both carry their own unique sets of considerations and advantages, so we have called out some of the most important aspects to keep in mind which differentiate each market segment.

Generally speaking, commercial property leases are longer and deliver higher annual yields than residential investments. Across Victoria we traditionally see commercial yields starting from about three per cent, however in some regional area’s yields can reach up to as much as nine per cent. 

In the current market a residential investment yields roughly 2.4 per cent.

Another advantage to commercial property investment is that tenants front the bulk of the everyday running costs of the property. This includes things like insurance, fire protection, council rates, body corporate fee’s, non-structural maintenance and in some cases land tax and management fees can be absorbed by the lease holders.

What areas should I be looking at?

Similarly to the residential market, commercial properties in metropolitan and suburban areas across all of our capital cities command a pricing premium.

In the Victorian market we have found that suburban fringe regions have driven solid investor interest and transactions over the past year, especially for properties occupied by nationally trusted companies.

Good proof-points of this heightened demand and sales activity for commercial property assets can be found in Melbourne’s outer south east, where we have sold the same two United service stations and Kool Kidz childcare centre’s twice in 24 months.

Located in Dandenong South and Cranbourne West, the service stations originally sold for $4.9 million and $8 million, and after two years were sold again for $6.12 million and $8.5 million, respectively – and a Kool Kidz childcare centre also in Dandenong South for $6 million and $8.628 million demonstrating growing appetite for set-and-forget diversified commercial assets. 

Keeping a close eye on what planning zone a commercial property is located in can also have huge benefits for your investment. 

There have been several cases we have observed over our years of operation where a commercial property’s value has skyrocketed following planning amendments and zoning restructures. 

The West Melbourne market is a great case study for this, as the recent endorsement of the West Melbourne Structure Plan and c385 planning amendment will rezone much of the area, with a focus on mixed-use development – which will broaden the spectrum of commercial applications in the now tightly held residential and industrial suburb.

Sticky tenants can add value to your property

Annual rent increases are also common in the commercial sector, meaning that further value is added to your investment every year with medium to long-term tenants that will help keep control of any operating cost, interest rate and inflation rises. 

The value of your property usually increases as its rent does, while partnering with the right tenant (or multiple tenants) can also inject additional value into your investment if they decide to customise the space to suit their business needs. 

In our experience, we have seen property modifications including aesthetic enhancements like new paint, flooring, plantings, as well as functional adjustments like break-out meeting and workshop spaces implemented by lease holders drive significant gains in investment – sometimes by factors of 30 – 40 per cent – simply by tweaking property to suit their requirements and style preferences. 

Maintaining your investment property

If you’re planning on entering the commercial property market, then it is essential that you stay up-to-date with the administrative duties required to remain compliant and ultimately run an investment property successfully.

Not having time to dedicate to your investment property is not a dealbreaker. There are many ways you can operate your investment property passively, which includes our property management services.

We currently have approximately 200 properties under management in Victoria representing over $200 million in value, so if you are in the market for a set-and-forget style of commercial asset investment, but want a specialist team to run it on your behalf, we would love the opportunity to speak with you about this.

For more information about investing in the Victorian commercial property sector, or our industry-leading property management services, please reach out to us at: info@jonesre.com.au