When you plan to invest in Australian commercial property, you should gain an in-depth understanding of the complex factors that drive the markets, unique financing vehicles and comprehend commercial property law or speak to a commercial lawyer, and, discussions with commercial property lawyers. You may also want to explore leasing options, property management services, and get a grip on potential risks. Once you complete this basic homework, you would have laid a reliable foundation for choosing commercial properties for investment that can grow in office, industrial, or retail settings. The following are the major considerations that apply to investing in commercial property across sectors.
Identifying major drivers of commercial property in the Australian market
Demand is the primary driver of property markets anywhere around the globe. However, economic factors and growth in population influence the demand for commercial property. A strong economy will aid your investment in commercial property and a booming commercial market derives support from local, national, and international economies. In a growing economy, many components like the transport sector, manufacturing, building, imports, logistics support, and other areas also grow in tandem. When multiple sectors experience healthy growth, it pushes up the demand for commercial property with more and more businesses needing space to house their activity.
The RBA or Reserve Bank of Australia is invested with the responsibility of managing inflation. When the interest rates rise, it slows down growth, and businesses also grow at a slower speed. Consumer spending is also impacted by higher interest and further slows down the demand for residential and commercial property.
Infrastructure is another key metric in judging the growth of commercial property in any market. Thoughtful infrastructure development can do wonders for the demand for commercial property not only around the core of the city but also in the peripheral areas. Businesses like warehouses always prefer to house their business on the outer ring. Cheaper costs and easier access to good transport facilities encourage logistics service providers, supply chain management companies, and similar businesses to be away from the core of the city.
When different sections of the population move to new locations, it brings along new opportunities like what happened with the baby boomers brought enhanced demand for healthcare services, childcare services, schools, etc. The thrust on lifestyle encourages people to look for homes nearer to their workplace. This also paves the way for small offices sprouting in these lifestyle suburbs such as the northern beach neighborhood of Sydney.
Growth in population is another significant driver for many businesses and services. When new suburbs start growing, it needs shopping malls to cater to the demand for clothing, gadgets, specialty shops, grocery stores, office space, and support services.
If people do not come out of their homes and spend money, businesses will stagnate as it is happening now in the wake of the ongoing pandemic. In the early days of the pandemic, many nations and communities imposed lockdown preventing the mobility of people. But, in the later months, there was gradual relaxation in the curbs and businesses started opening up with measures imposed for personal safety. Yet, in many regions around the globe, people are just not daring to step out. The impact of this self-restraint is felt by many businesses across cities and towns.
The next step is to analyse your perceived risks in investing in Australian commercial property. Although a well-researched investment in commercial property can earn decent returns for several years once it is up and tenanted, investors should also be prepared for adverse circumstances like what we are experiencing today. You should particularly understand commercial property law and better still speak to a commercial lawyer. Long term lease may be advantageous, but it could take longer to find a new tenant if the property falls vacant. Prolonged vacancy in commercial property is not uncommon and therefore investors should factor in the carrying cost if this happens.
Size of your commercial property
In comparison to small suites, leasing out large properties can be harder though, you will have the convenience of dealing with a single tenant. But holding large properties vacant even for a few months can hit the bottom line adversely.
You should also envisage problems that may be caused by potential changes to the demand/supply balance. If new properties come up in the market in a short space of time after your investment, it can present challenges and a strong supply can translate to reduced yields.
Any major changes to infrastructure can bring beneficial or negative changes to commercial properties in terms of returns on investment. At times, significant new developments away from the core of the city can encourage businesses to move into a more spacious and potentially peaceful location. On the other side, if you had chosen a less developed neighbourhood and new infrastructure projects come up closer to your property, it could work to your advantage.
Designing the lease
The way your lease documents are designed can significantly impact your commercial real estate investment in Australia. Some of the major considerations while designing your lease terms include:-
- Long-term lease of 3, 5, or even 10 years with a renewal option
- Rental increase, generally linked to the CPI
- All outgoing like rates, body corporate fees, rates, water, etc. are to the account of the tenant
- Physical changes made by the tenant should be made good on vacating the premises. Tenants may, however, be allowed to create partitions but should restore them to the original state when they vacate.
- Approval from a special council may be needed for certain types of businesses like child care centres, and medical centres, and such approval should be the responsibility of the tenant.
- Leases above a certain threshold in value may be registered by a distinct authority.
Off-plan or small new commercial warehouses and suites in areas with high demand come with a lower risk for investors seeking entry into the commercial property space. Entry prices may range from $250,000 and returns during the first year may be guaranteed. An Annual CPI increase is expected to help reasonable yields in the subsequent years.