Commercial property investment guide

Commercial properties are an attractive asset class for many Australian property investors seeking strong returns, positive cash flow and long-term capital growth. Others find commercial property investment appealing thanks to lease terms that are generally far longer than you’ll find in the residential market.

Either way, commercial property investment can be a great alternative to residential property. That said, you don’t have to choose between the two, particularly as buying a commercial property can be an excellent way to diversify your investment portfolio.

What is commercial property investment?

Commercial property investment is when you buy properties used for business activities. These generally fall into one of four distinct asset classes, each with its own set of pros and cons:

Office
Retail
Industrial
Speciality

These property types can then be subdivided into other categories, such as hotels, pubs, service stations and childcare centres.

Generally speaking, commercial property investment returns are closely linked to Australia’s economy. That’s because when the economy is strong, demand for commercial premises generally increases as businesses do well. Conversely, demand for business premises will typically fall during a downturn.

However, each commercial property type may react differently to the same economic conditions.

A good case in point is during the 2020-22 pandemic, when more people worked and shopped from home. As a result, there was a decline in demand for office buildings and retail spaces. On the other hand, industrial assets boomed as ecommerce drove demand for logistics and warehouse space.

Is buying commercial property a good investment?

So you might be wondering: “Is commercial property a good investment?”

As with any asset class, buying a commercial property can be a smart financial decision when done correctly. So you need to do thorough research on the commercial property market so you can identify quality investment opportunities.

Factors to consider when weighing up the question ’Is buying a commercial property a good investment?’ include:

Location: What’s considered a desirable location for your tenants will depend on the type of property you want to buy. For example, warehouse tenants will likely want to be close to major roads and airports, whereas a retail business will likely care more about the presence of other businesses and its accessibility to customers.
Tenant quality: The quality of your tenants will be crucial to the success of your investment. So it’s advisable to consider the financial strength of existing tenants, as well as their lease terms, before signing on the dotted line.
Building condition: The condition of the property can significantly impact its value and rental income potential. A well-maintained property with modern amenities is more likely to attract high-quality tenants and command higher rents.

Commercial property investment pros

High-income potential: Commercial properties offer higher rental income potential than residential properties, providing a stable source of cash flow for investors
More objective price evaluations: Commercial properties are generally valued based on their rental income, making it easier to assess the property’s value objectively
Long-term capital growth potential: If the property value appreciates over time, investors can realise significant gains if they eventually choose to sell
Diversification: Investing in commercial property can help diversify your investment portfolio, reducing your overall risk exposure
Potential tax benefits: Investors may be eligible for tax benefits, such as depreciation deductions and capital gains tax concessions
Longer lease periods: Commercial leases are generally longer than residential, with a typical term usually between three and 10 years
Tenant pays outgoings: Commercial tenants generally pay for the building’s outgoings, such as body corporate fees, strata rates, water rates and land tax

Commercial property investment cons

Upfront capital required: Commercial properties are generally more expensive than residential, making them less accessible to some investors, particularly when it comes to raising a deposit
Research intensive: You need considerable knowledge to navigate the complex commercial property market
Market volatility: The commercial property market can be volatile, with fluctuations in demand and rental income as the economy ebbs and flows
Longer vacancies: While commercial tenants might sign long leases, it can take longer to find a tenant once it becomes vacant

How to buy a commercial investment property

While commercial properties typically offer higher returns than residential properties, the risks are generally much higher. So it’s crucial you know what you’re getting into before you proceed, particularly when it comes to securing commercial property finance.

As part of the process, it’s a good idea to speak to a finance broker who will:

Educate you on how to finance commercial real estate
Help you compare commercial real estate loans

What is commercial property finance?

Commercial property finance is a type of specialist financing used to purchase, develop or refinance commercial real estate. The financing options may include a variety of loan types, such as commercial mortgages, bridge loans, mezzanine loans and construction loans.

Typically, commercial property finance requires a higher deposit and will have higher interest rates and fees than residential finance, thanks to the increased risk associated with commercial real estate.

Each lender will have their own way of assessing applications, though they will all generally consider the:

Property’s location
Property type
Security for the loan
Loan-to-value ratio (LVR)
Borrower’s financial position and creditworthiness
Strength of the tenants and the length of time left on their lease
Current and future state of the economy

As a result, the rates and terms you get on commercial real estate loans can vary widely depending on the lender. To further complicate matters, they won’t usually be publicised.

Given this, you’re likely wondering how to finance commercial property?

Well, one way would be to go direct to the bank. However, that will likely involve countless hours spent doing research and handling paperwork. What’s more, if you apply to the wrong lender, you could get knocked back – potentially damaging your credit score in the process.

Alternatively, you could have an expert commercial real estate loans broker like Crowd Property Capital do all the running around for you.

To discuss your commercial property investment options, book a free strategy session with David Lovato.

Phone: 0434 932 634
Email: [email protected]

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Frequently asked questions

Is commercial property investment a good idea?

Commercial property can be a good investment as it offers the potential for stable income and capital appreciation. However, it also requires significant capital outlay and carries risks that require expertise and time to manage effectively.

Are commercial properties a better investment than residential?

As with any investment, It depends on your goals and risk tolerance. On one hand, commercial properties generally offer higher rental yields and longer lease terms than residential; on the other, commercial investing is often more complex and requires higher upfront costs.

Do commercial properties appreciate in value?

Commercial properties can appreciate in value over time, but it depends on factors such as location, market conditions and property type. Capital appreciation is not guaranteed and can fluctuate over time, as the property’s value is often tied to the strength of its leases.

What type of commercial property is most profitable?

The most profitable type of commercial property depends on various factors such as location, market conditions and the property’s condition.

What is a reasonable return on commercial property?

A reasonable return on a commercial property can be anywhere from 5% to 10% but may be higher or lower depending on the specific circumstances.

Legal & Compliance

Crowd Property Capital Pty Ltd (CPC)

A registered company under the Corporations Act 2001, ACN 600 539 544

An accredited member of the Finance Brokers Association of Australia (FBAA) Member No M-352808

A licensed Corporation under the Property, Stock and Business Act 2002, Corporation License No. 10065109.

A member of the Real Estate Institute of NSW (REINSW)

David Lovato (Sole Director) holds a Certificate IV in Finance and Mortgage Broking and Property Services (Real Estate Agents License No 201 604 57 )