Understand the commercial property market

June 24, 2014
Carol Pizzey

The fundamental driver for commercial property growth is similar to the residential market – it is demand. However, commercial demand is driven by economic factors as well as population growth.  A strong economy is fundamental for any successful commercial property investment. Booming commercial markets are supported by strong international, national and local economies.


As the economy continues to grow, the demand will start for warehouse space, then retail, followed by office.


Other factors that influence commercial property demand are:


Interest rates 
- Increasing interest rates helps slow growth
- The cost of money is higher and the rate at which companies can grow is reduced.
- Additionally, increasing rates reduces consumer spending.
- This has a slowing effect on the demand for both commercial and residential property.


Infrastructure development - Some examples are
- Freeways or expanded highways are a good example
- New or expanding suburban areas
- High density inner city development


 - As lifestyle becomes increasingly important, more people want to work nearer to home.
- There has been an increase in the number of small offices located in lifestyle suburbs such as rural areas and beachside towns 


Population growth
- Locations that have strong population growth require many services.
- As new suburbs spring up, shopping centres are built to service the growing consumer demand. - Grocery stores are required, then cafes and specialty shops, support services (small industrial), and then office space.


 Risks to be aware of : 

  • Lease terms 
    Long-term leases of 3–5 years or more can have advantages, but it takes longer to find a tenant if the property becomes vacant. Prolonged periods of vacancy are common and an investor will need to be able to handle the carrying costs during this period.
  • Size of commercial property
    Larger commercial properties can be harder to lease than small suites and will cost a lot more to hold.
  • Supply/demand
    Changes in supply conditions can create potential problems. An increase in new property coming onto the market in the same area creates a threat to existing tenancies as tenants may look to upgrade or expand. Strong supply can also reduce potential yields.
  • Changes in infrastructure
    Major infrastructure implementations or changes have both a beneficial and negative effect on commercial property returns. While infrastructure can attract commercial investment to an area, it has the negative effect of drawing tenants from existing areas. Keep in mind that areas close to CBDs are always popular. However, new growth areas further away tend to have more pronounced cycles.


Investment structures
- Individuals, companies, syndicates of investors and trusts can purchase commercial properties. - For individuals or groups of less than five, an ideal structure to use is a Self Managed Super Fund (SMSF).


- Commercial property finance is often more complex than normal residential funding.
- Normally banks will lend up to 70% of the value of the property but this value is often based on the rent/yields achieved by the property. 


- The management of commercial property is usually undertaken by commercial agents who operate more like ‘dealmakers’ than traditional residential agents.
- An agent will try to match the property with an appropriate business and can lure businesses by arranging attractive deals, like rent-free periods, free fit-outs and the like. 


The lease
- Leases can be three, five or even 10 years with an option to renew and increases linked to CPI
- The tenant pays all outgoings. This includes rates, water, body corporate fees, etc.
- The tenant makes good any physical changes
- Some types of tenancies may require special council approval, for example chemical treatment facilities (such as those used by an electroplater), medical centres, childcare centres and so on.

- Small new or ‘off-the-plan’ commercial suites or warehouses in high-demand areas provide a lower risk option for investors to enter the commercial property market.
- Entry prices range from about $250,000 and initial returns are often guaranteed for the first year. - After this, regular yearly CPI increases help maintain reasonable yields.

So call me, Michael Wren, 03 9813 3522 or 0439 207 242 or email michael.wren@mortgagechoice.com.au to discuss in more detail.

Posted in: Business lending

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