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The Complete Guide to Investing in Commercial Real Estate in Sydney

Investment in property has been long viewed as a means to secure finances and create assets. Traditionally, investors depended on residential property as it was familiar territory. Also, many considered commercial real estate as a risk-packed proposition because of the fluctuating market prices. However, with more disposable incomes and increased savings, Australians are now graduating to high-yielding commercial investments. With the significant advantages of amplified cash-flow and long-term tenancies, commercial real estate has emerged as a viable investment plan that bolsters their property portfolio. Improved rental assurance and limited ongoing expenditure make the opportunity more lucrative and rewarding. With ample knowledge of the market forces, financing requirements, and lease arrangements, a savvy investor can enjoy a successful inning in this domain.

The demand for commercial property for sale in Australia has peaked in the past few years as families are opening up to the idea of owning money-spinning assets. Sydney mainly has been on the radar of smart buyers who understand the risks involved and have researched the market thoroughly. The reason behind this surge is the diversified economy and high commercialisation of the city and its surrounding suburbs. The metropolis has a cosmopolitan culture which exhibits the myriad hues of a world-class city. From beautiful cafes, classy bookshops, established legal firms, and petrol pumps to skyscrapers swarming with offices of multinational companies and the banking sector, the city has everything you can imagine.

The fiscal year 2018-19 has brought in more good news for commercial real estate as the prices have gone through the roof. Record transactions of $19 billion took place in the year as family investors were enticed by the growing segment. The game changers of the season were childcare centres, fast-food restaurants and service centres which were acquired by first-time buyers. Although it is a thriving sector, there are many factors involved in the process such as GST implications and responsibility of outgoings. You must be aware of the nitty-gritty before you delve deeper into this industry. Here is a comprehensive beginner’s guide to this elusive category which can help first-time buyers to make sound investments.

 

1.  Choose The Type Of Property

The commercial sector has categories such as retail, industrial and office. Sydney is brimming with commercial spaces which have excellent potential due to the massive population in the area and the business feasibility of the region. Also, the returns from commercial units are far more pronounced than residential properties. You need to identify the type of property you wish to invest in after evaluating the ROI. The range of yield varies from one type to another. For example, warehouses generate more cash-flow than a retail shop.

However, the risk of higher vacancy rate also magnifies with the rise in the money. It is possible that a warehouse or a unit may remain vacant for a long time till you find a tenant. In some cases, the tenant may wind up or shut shop and leave you with a tough financial condition. However, this risk is averted in Sydney as the city’s GRP is estimated to touch $121.14 billion in 2018. The large economy has many commercial areas like the Sydney CBD, Parramatta, Chatswood and others. With so much trading happening in the hinterland, it is highly unlikely that property will remain vacant for long.

 

2.  Choose The Location

To enter the commercial property of Sydney, you need to check out the websites of Real Estate Institute of Australia (REIA) or the Real Estate Institute of New South Wales (REINSW) to know more about the sector. Before you acquire commercial property, you must be aware of the cost of its renovation, maintenance and management as it will affect the ROI. You need to conduct due diligence to understand the estimated revenue which will be generated from the rental income and the taxes that you will have to pay.

The CBD properties are highly priced, but there are many lucrative properties in the outskirts which can be snapped up by business-minded people. For instance, the M7 bypass near the western outskirts of Sydney has experienced the burgeoning of warehouses due to the improved infrastructure in the area. With a lot of families moving to the new suburbs, the demand for childcare facilities, supermarkets, cafes, grocery shops, and support services has enhanced. Whether you are leasing a commercial office in CBD or outer suburbs, the returns are terrific across Sydney.

 

3.  Financing and Leasing

Getting a loan for purchasing commercial property is often more complex and challenging than securing a residential property loan. Australian Banks can lend up to 70% of the price of the commercial property. However, this limit can vary depending upon the ROI. After the acquisition, the next step is leasing the property to a competent tenant. The term can last up to three, five or ten years and can be renewed if required.

The rent can be increased according to the Consumer Price Index which is the fairest way to raise the rent. The tenant must pay the outgoings such as electricity and water bills and the body corporate fee. The tenant is also allowed to make changes to the interiors to carry out his business. You will have to get special council approval if you are leasing the property to a chemical treatment facility as well as a medical facility or childcare centre. The leases which cross a specific value need to be registered with the Department of Lands (NSW).    

 

4.  Market Forces Involved

Though the Sydney region is witnessing a renewed vigour in its commercial activity, it is not devoid of the market risks. It is known for long-term leases which usually last from 3 to 5 years. However, the tenant finding period may get prolonged. You must be able to pull off the financial load of outgoings and loan during this period. Keep this point in mind when securing finance from banks or lenders. The bigger is the property, the higher will be its cost, so choose the size wisely.

Also, if there is an increase in the supply of commercial spaces in the area, it can make the tenant look for cheaper options. So demand and supply can bring changes in the prices. The awareness of all these possibilities can help the investor in picking up the best property for acquisition.

 

 5.  Maintenance and Expenses

When the time comes for refurbishment at the time of new tenancy, you must be ready to shell out a good amount of money as the needs of a commercial set-up are higher. For example, upgrading the HVAC system can cost thousands of dollars, and it must meet the health and safety standards. The rest of the outgoing expenses are managed by the tenant such as insurance, small repairs and maintenance of the building. However, during the vacancy period, this cost will be borne by the owner. Thus you must have additional funds in your kitty to survive these periods.

 

Conclusion

From mum-and-dad investors to owner-occupiers, the number of first-time buyers has amplified in the past one year. The yield is better as the Sydney market is flourishing and the surrounding areas are showcasing striking infrastructure development. Thus if you wish to purchase commercial real estate for sale in Australia, then find the best property that assures an excellent return.