27 September 2024

Commercial vs residential property: What every investor should know

| Hayley Nicholls
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Commercial property

Investors can reasonably expect anywhere from five to 10 per cent net returns from a commercial property investment in the current market. Photo: File.

Commercial real estate is often overlooked by first-time investors. When searching to buy an investment property, most initially turn towards houses and apartments.

Residential real estate is familiar territory and widely considered a reasonably ‘safe’ investment option.

Consequently, new investors view residential property as the ‘go to’ choice of property investment but some are starting to recognise the advantages of exploring different real estate sectors.

Investing in commercial properties such as retail shops, office premises or industrial warehousing, can offer distinct advantages and potential for higher returns.

The commercial property landscape consists of three main sectors: industrial, retail and office. Each sector carries unique challenges, risks and rewards.

We’ve all heard the old saying ‘the higher the risk, the higher the reward’ and certainly that can be true in investing in commercial property.

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Raine & Horne Commercial Canberra director Mark Nicholls, says commercial property investment can be more challenging and costly to enter. But if you can overcome these initial hurdles, it can provide longer-term security and higher returns than its residential counterpart.

“In the current market, you could reasonably expect anywhere from five to 10 per cent net returns from a commercial property investment, depending on the property sector, location, age, tenant profile and lease terms,” Mark says.

“Commercial leases are also very flexible and formed on a case-by-case basis in negotiations between landlord and tenant. They tend to be much longer than residential leases – typically a minimum of three to five years – often including annual rent increases to keep in line with inflation, and can also be structured so tenants directly pay outgoings. So they can offer good security.

“Another benefit from being a commercial landlord is that tenants would typically pay to fit out the premises to suit their business requirements, and you’re protected by a ‘makegood’ clause in the lease, meaning tenants are required to reinstate the original fitout, if required.”

Raine and Horne Commercial Canberra director Mark Nicholls in the office

Raine and Horne Commercial Canberra director Mark Nicholls says commercial leases tend to be much longer than residential leases. Photo: Michelle Kroll.

When purchasing commercial property with the intent to lease to a tenant, it is important investors understand the zoning requirements of the property and its allowable uses.

In the same way you can’t buy a house with the intent to open a casino, similarly you can’t necessarily purchase a warehouse in Fyshwick with the intent to open a medical facility.

Each commercial building is subject to a purpose clause, so always ask your agent to identify the property’s permitted uses.

When investing in any property, it’s also important to be aware of how stamp duty and GST can affect your purchase, as well as any concessions available.

As of 1 July, commercial properties purchased for under $1.9 million are exempt from paying stamp duty.

“This is a fantastic concession which has seen more interstate investors looking to enter the Canberra market, as well as local residential investors looking at their other options because stamp duty is still applicable on residential property in the ACT,” Mark says.

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If you buy a vacant commercial property, you’ll likely need to pay GST on the purchase since most sellers are GST registered. But if the property already has a tenant in place, GST doesn’t apply.

Of course, as with any investment, there are common pitfalls and barriers to overcome.

The first challenge to entering the market is the banks’ strict lending criteria for commercial property.

Typically a residential investment would require a five to 10 per cent deposit with loan terms spanning up to 30 years. A commercial investment may require up to 20 or 30 per cent deposit or equity and tend to have shorter loan periods with higher interest rates.

Commercial investment is not just for those with substantial capital. A variety of options exist within this sector that can cater to a range of budgets and goals.

A common solution is to form a consortium or purchase the property within your self-managed super fund. Either way, it is important to consult a trusted financial adviser for guidance tailored to your circumstances.

For more information visit Raine & Horne Commercial

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