If you have been to any commercial property investment seminars lately, you may be convinced that the answer to the question ‘should you invest in a commercial property’ is yes – and the sooner the better! With sound research, a realistic appreciation of your own appetite for risk, a little luck and some good advice, investing in commercial property can be a very lucrative and rewarding choice. However, if you do not take careful consideration of the legalities involved, it can be a very costly and painful one.
Usually, the answer is not a simple yes or no to whether you should invest in commercial property. More often the decision is between a commercial property versus a residential property.
One of the most attractive things about commercial properties is that the rate of return can be much higher. Across Australia, rates of return for commercial properties between 8% and 15% of gross rental yield are not uncommon. In booming markets, the return may be even better.
However, it is important to note about rent review when discussing returns on your investment. Rent is typically reviewed annually to the Consumer Price Index. If it is not reviewed by the CPI, it will either be determined by a fixed amount or the landlord may propose a rent based on current market prices.
Tenancies are also usually longer in commercial properties, often ranging between three, five and ten years with options to renew, especially when tenants have invested in customised improvements to the property. Furthermore, leases over three years (including option to renew) may be registered at the Land & Property Information, affording the landlord better protection and securing their interests.
In addition, commercial leases commonly require tenants rather than landlords to shoulder the burdens of ongoing costs including council rates, water rates, and repairs made to the property. Commercial landlords may also have greater latitude to make financial decisions about the management of the property.
However, it is important to remember that risk and reward are linked variables. Investing in a commercial property is not something to undertake on a tight budget.
The more desirable commercial properties can be expensive to finance, with sellers often requiring large deposits. Banks will generally lend only 70% of the purchase price.
In terms of leasing a retail shop, these are heavily regulated by the Retail Leases Act (1994) and affords more protection to the tenants.
When a tenant leaves a property, it may take many months to fill the vacancy. It is important to perform careful due diligence on the financial stability of a potential lessee, which may add time and cost to the re-letting. Lease conditions can make or break an investment, such as requiring tenants to pay all outgoings, rent reviews and increases, and requiring tenants to make good on all damages to the property.
Capital growth will depend on the ability to raise the rent, and investors may need to have funds available for ongoing building and upgrading costs.
There is also the risk of getting “locked into” a building that may prove to be too small for business expansion or too costly to turn a profit. However hot the market today, the value of an investment in commercial property may be very sensitive to factors entirely outside of either the landlord or tenant’s control. These factors could include an increase in supply, an economic downturn, rising interest rates, high unemployment or poor business confidence. Other factors may include the location and quality of the building.
None of these are necessarily a reason not to invest in a commercial property, but all are reasons to tread carefully.
Get Some Good Advice
The advice of an experienced commercial property lawyer that is familiar with
local market conditions can be invaluable in evaluating a commercial opportunity.
At Owen Hodge Lawyers, we also recognise that an ongoing legal relationship can also help an investor navigate the details of lease negotiations and financing choices, among other issues. Please call us at 1800 770 780 to discuss how we can help you make a sound commercial property investment decision.