Getting started in commercial property investment
For the past couple of years, real estate industry observers have been all about the residential market. Median house prices in Australia's capital cities, particularly Sydney and Melbourne, have been skyrocketing, rising as much as 77 per cent since 2008, according to Tim Lawless, CoreLogic RP Data head of research.
If there's one fundamental truth in the real estate market however, it's that what goes up, must come down. Already some commentators are predicting the easing and subsequent downturn of Australia's housing sector, with QBE's Australian Housing Outlook 2015-18 suggesting that capital city growth will taper off and begin to fall over the next couple of years.
So where to now for investors? As the housing market comes off the boil, are there still opportunities in real estate? Perhaps it's time you talked to your buyer's agent about getting into commercial property investment.
How is the commercial market faring?
Before seriously considering investing in commercial property, it's worth educating yourself about the state of the market. Just like in the residential sector, commercial real estate has been enjoying solid returns, with total sales recently passing the $20 billion mark for the third time in as many years. Commonwealth Bank of Australia's most recent Property Insights newsletter notes that 2015 in particular has been big, forecasting total sales to tip over $25 billion by year's end.
Already some commentators are predicting the easing and subsequent downturn of Australia's housing sector.
Unlike residential real estate, the commercial market shows no signs of slowing down, at least according to an Australian Property Institute (API) survey of Sydney, Melbourne and Brisbane. Across the same period where house prices are expected to ease, commercial sales in Sydney and Melbourne are predicted to continue climbing well into 2017.
While some investors are proceeding with caution, shaken by negative signals out of the residential market, API NSW president George Vallas told AAP that those worries aren't present everywhere.
"That caution hasn't pushed into the commercial market, and that's because there's still rental growth expected," he said.
How do I get involved?
Once you're confident that now is the time to jump into the commercial property market, all you need to do is find the perfect opportunity for you. It may sound easy, but there are several factors you need to consider:
Type of investment
Commercial property is generally divided into three distinct forms – office, retail and industrial. Depending on where you're interested in buying, the properties for sale in the area will take one or more of these forms, but it pays to focus on one, particularly as you're starting out. Central city investments usually take the form of office sales, whereas in new developments in suburban or regional areas you are more likely to see retail or even industrial options.
If you're looking at an existing property, it helps to be well informed about the history of the asset. Research as much as you can about performance and capital growth in the past, and also consider similar assets in the area or elsewhere. A sub-par performance shouldn't necessarily be a sign to walk away either; it can give you added leverage when it comes time to negotiate a final price.
An extra wrinkle when buying an investment property comes from lessees. Let's face it, not all of your tenants are going to be perfect, paying all rent on time and leaving your asset exactly as they found it, but with some due diligence you can assess the quality of the property's current agreements. Whether you manage tenancies yourself or employ a property manager, maintaining a good relationship with lessees is crucial.
As part of your initial research, find out as much as you can about lease turnover, any long-standing issues with current tenants, and agreements which are up for review or soon to expire. Keep an eye out for properties with "blue chip" lessees – large corporate or government outfits that are unlikely to vacate unexpectedly or miss payments.
If you're looking at an existing property, it helps to be well informed about the history of the asset.
Just like a residential landlord, as a commercial investor you will be responsible for day-to-day repairs and necessary upgrades in and around your asset. Depending on the size of your property, keeping on top of wear and tear can be an expensive endeavour, so factoring in future maintenance costs should be done as part of your initial buyer's budget.
Consider the age of your prospective investment – an older structure is more likely to need repairs – and ask to see a maintenance history.
Get help from a buyer's agent
As you can see, there are a lot of things you need to think about before involving yourself in commercial real estate investment. Even at times when the industry is strong, there are no sure things, so before you get too far down the path, reach out to a buyer's agent to guide you through the buying process. The benefits offered by an experienced expert with a large network of contacts within the industry should not be overlooked, so make an appointment today and ease your entry into commercial property investment.