It’s not only residential real estate that’s been going through yet another boom in recent times. The commercial property side of the game has also been attracting a new level of interest—and for good reason.
In the past, commercial property investment has been considered a more complex part of real estate but now it is being seen in a new light, revealing solid benefits and potential robust returns.
“The appetite for commercial property has really increased in the past few years, with a lot of established investors looking into this area,” Julian Muldoon, director of 1Group Property Advisory, says.
“Health care property assets have become the most sought after, and that’s amplified in recent months for reasons that make good business sense.”
It can prove far cheaper to buy your own commercial premises than to pay rent.
“I’ve had clients who are astounded when I explain it’s often cheaper to take out a loan and ultimately own their own business premises than to be a tenant,” Muldoon says.
If a low-rate loan can be secured, buying a commercial premises—either to work in or to lease out—can lead to cash flow savings, at the same time as adding a new investment to your property portfolio.
“If a rental income attracts a five per cent return in rent (in relation to the asset value), but you buy the premises on a three per cent interest rate, then you’re two percentage points ahead and making the most of all the capital appreciation of the asset as well.”
Owning your own commercial premises offers a sense of security of tenure as a practice owner. “One of the biggest challenges we see with tenants is ongoing negotiations with landlords about rent, terms of the lease and building improvements,” Muldoon says.
When establishing a practice in a particular location, the practice owner wants to know they have the potential to become securely established at that address, rather than be at the whim of a landlord who might not want to extend the terms.
“When you own the premises or the building, you are your own landlord and that allows you to make secure decisions about your location.”
While a medical practice fit-out can be very costly, it can add value for the owner of the property.
“The fit-out of a practice increases the value of the property asset significantly, but if you don’t own the space, then you have increased the value of someone else’s asset,” Muldoon says.
He uses the analogy of a residential tenant installing a new kitchen at their own cost, boosting the value of a property they don’t own. “It’s the same with spending big dollars for a fit-out. If you also own the space, then you benefit from the increase in value.”
As an investment, commercial properties offer a greater rental yield compared to residential properties. The rate of rental income for commercial properties can be as high as six to seven per cent of the purchase price, while in residential, it’s between two and four per cent in capital cities right now.
“If your focus is on superior cashflow and passive income, this is where a commercial property investment can be an alluring strategy,” Muldoon says.
This is also a consideration if you’re looking to purchase your practice premises now. Come retirement, retaining the property as an investment could provide you with a steady rental income.
Another attractive aspect is that with most commercial lease agreements, the tenant is responsible for such outgoings as owner corporation fees, water, council rates and land tax.
While it’s true that commercial property values have dropped in most Australian CBDs, it’s a different story in certain suburban and regional centres, which are often the preferred locations for healthcare providers.
“Many suburban areas are thriving with significant increases in commercial property values,” Muldoon says. He adds that a number of his veterinary clients buy commercial spaces based on visibility and freeway access.
“An example is in Geelong, where industrial land has jumped almost 40 per cent in 12 months. In such cases, investors are happy they’re getting the best of both worlds—strong capital growth and a cashflow return.”
Purchasing commercial property has also become a popular strategy to diversify investments.
“Spreading the risk over different sectors can be a good move, so when one market is down, another one might be performing well,” Muldoon says.
Doing so can also prove to be a smart move when planning eventual investment asset exit strategies.
“This allows the investor to exit some markets when they’re at their peak. When you spread your interests into a number of investment buckets, it’s easier to navigate the big market swings that come along.”
For all the positives of purchasing commercial real estate, there are many variations that demand thorough investigation.
“Buying commercial property requires a level of insight before you step into it, and the key is to do all your homework first to decide if this is the best strategy for you,” Muldoon says.
“Before you do anything, first speak to your accountant, a reputable specialist lender like BOQ Specialist and an independent property adviser like 1Group so you know what best suits your circumstances.”
You can find out more about our commercial property loans and limited time offer by contacting your local finance specialist on 1300 160 160 or visiting boqspecialist.com.au/commercial.
