Commercial property is considered a bargain deal as it proves beneficial in the long run with its increased return on investment. Many investors who want to use their money wisely are attracted to commercial real estate in Australia as it offers them longer lease periods and better rental yield along with minimal outgoings and price appreciation. With stable markets and commercial property sector booming in the country, it is the best time to invest and reap the rewards in future.
The increase in the number of industries, employment rate and skilled population has strengthened the confidence of buyers, who are encouraged by the price stability factor of this domain. However, if you are not a seasoned player and have just entered the arena, then you need to prepare yourself for the big game. Here are a set of rules that will help you in making a smart commercial real estate investment.
1. Review The Market
It is imperative to understand the market before you invest so you must carry out research about the fundamentals of commercial real estate. Read about the due-diligence process, tenant finding ways, financial stability, brokers, high revenue-generating commercial tenants, maintenance costs, lease contracts, legal implications, vacancy rates, rent, etc.
Equipped with all this knowledge, you will be in a better position to make informed decisions. It will also prepare you for the long-term investment and make you aware of the market trends.
2. Property Location
The location of the property is of utmost significance as it determines the expected revenue generated from the purchase. The ROI is retrieved in the form of rental yield and price appreciation, and both of these factors are dependent on the location. The area must be well-connected and easily accessible via public transport.
The surroundings must include enough entertainment avenues such as restaurants, bars, shopping strips to create an inviting environment. Additionally, it should not have many other similar commercial zones in proximity as it can lead to a higher competition, which can bring down the rent and increase the vacancy rates.
3. Type Of Property
The quality of the construction and its presentation make a lot of difference to the final structure. A-grade or premium properties are the best investment options, followed by B-grade real estate. Sometimes, these properties could be standing next to each other, but the structure with a high standard of amenities will fetch better rent and capital appreciation.
Such properties also attract multinational tenants who are willing to pay higher rents for better quality. So you must enquire about the best builders and check the outer appearance, quality of elevators, green area, passages, lounge areas, terraces, view from the windows etc.
4. Infrastructure Development
You must visit the local council website to know about the infrastructure developments taking place in the vicinity and upcoming projects. The real estate agents can also shed some light on the future planning of the area and how it will shape up after the projects underway are completed.
The approach and elements of the geographical region play a vital role in determining its capital appreciation and rental yield. You must find locations that will outperform others in the long term and get the best returns. A highly developed and advanced area will get leased easily, while you may find few takers for an underdeveloped site.
5. Demand And Supply
Cities like Sydney, Melbourne, Perth, Brisbane, and Adelaide have a higher demand for commercial properties. They already have a stock ready which includes office buildings and warehouses that are completed and leased. Besides the current stock, these cities have an annual demand which is sufficed by the upcoming supply of new constructions that will hit the market in a few years.
As an investor, you must know about the level of demand and supply in your city. If the supply exceeds demand, then the prices will plummet and the tenants will negotiate on the rent. Thus you need to take this factor into consideration when putting your money in a property.
6. Building Interiors
A multi-purpose property can enhance your returns. Determine if the layout can be altered easily to make it suitable for different kinds of tenants. It will increase your target audience when you want to lease the office building. Sometimes, the builder provides the fit-out, which can be charged separately from the tenants.
In other cases, the tenant carries out the interior work himself which involves flooring, wiring, cabin constructions, conference rooms, reception, cafeteria etc. If the tenant is spending on the fit-out, then you can rest assured that he/she will stay for long.
7. Tenant Quality
You must find out about the quality of tenants occupying the building. Ideally, you should aim for blue-chip companies which are minting money and will pay the rents on time without any defaults. Stay away from failing businesses that will not be able to sustain themselves and default on their lease. You must also have appropriate cover to deal with such situations as it can affect your financial commitments.
You must be aware of the fact that commercial leases are long-term contracts which range from 3 to 25 years. This consists of an initial term followed by the option to renew the lease depending upon the requirement of the tenant. For example, a 15-year lease can be divided into 5+5+5, with renewals due after every 5 years.
The initial lock-in period is the fixed time during which the tenant cannot vacate the property. Many small businesses opt for a shorter lock-in period. However, you should not go for such offers as a vacant property can burden you with maintenance costs and taxes without getting any rent.
The tenant usually pays for all the outgoings and is working on the property so is responsible for its maintenance as well. Thus you make good returns in rental income as compared to a residential property. Also, as the lease period long, you don’t have to spend too frequently on repair and renovation when leasing the property to a new tenant.
10. Tax Benefit
Commercial properties provide tax benefits and depreciation allowances. Goods and Services Tax is applicable to the purchase of commercial property and on the rent charged from the tenant. However, you can claim GST credits on purchases which are connected to the leasing of the property.
Investing commercial property for sale in Australia is a rewarding proposition which brings along a lot of benefits. However, you need to be aware of the risks and make an informed decision after understanding the rules of investment mentioned above.