When it comes to choosing a property type for investment, commercial real estate has long been viewed as a superior option when compared to residential. But the market & environment has transformed over the last year, raising the question of whether or not that generalisation is still true. Undoubtedly, there is still plenty of money to be made in real estate investment a shrewd investor is one who makes a move. But when it comes to the average Australian, there is one clear choice.
Traditionally, commercial real estate has been the go-to place for solid investments. There are four main reasons for this. Firstly, rental returns are typically higher on commercial space than on residential properties. Second, maintenance costs on a commercial property are usually significantly lower. Furthermore, typical tenant agreements for commercial properties place more weight on the tenant, when it comes to outgoing expenses, than residential contracts. And lastly, lease agreements for commercial space tend to be long-term contracts, which can help reduce the risks associated with unexpected vacancies. So, there have always been a lot of solid reasons to lean towards investment in commercial properties. The costs of this type of investment, however, make entry into this space difficult for the average Australian.
Anyone considering investing in commercial property should consider the three types of commercial real estate and the way events of the past year have affected them.
First is office space. While office space has traditionally been in popular, the pandemic crisis gutted demand for this type of commercial property, both in the CBDs and nationwide. While some businesses have been able to cling to their traditional office spaces, more and more have shifted to virtual, either completely or in part. Property owners have had to offer heavy incentives just to get tenants through the door. Consequently, vacancy rates for office space are through the roof and the value of those buildings has decreased.
The next category of commercial real estate is retail space. These properties include space for businesses such as coffee shops, restaurants and retail stores. Once again, because of the crisis, people have transitioned from buying goods in-store to shopping online. And while there will always be some need for brick-and-mortar, current trends show people are not shopping like they used to. While more people are choosing to shop online though, lifestyle-based businesses such as restaurants and cafes have largely bucked the trend. In fact, Australians are spending more of their disposable income on dining and hospitality services – which is fantastic for properties catered to these types of businesses.
Warehousing is also another category of commercial real estate that should be considered when analysing commercial properties for investment. The same trend which has made retail shops less desirable has had a very positive effect on warehousing. That is because, as more businesses have shifted to an online business model, the need for storage space has increased. And with big online services such as Amazon committing to same-day delivery, warehouse space will need to be available virtually everywhere. In short, demand for warehouse space has been steadily increasing and the price of those properties and their rental yields have been quick to follow.
Of course, we mustn’t forget to look at residential real estate when considering investment options. One thing has always been and will always be true – people need a place to live. And currently, as a consequence of the pandemic, 175,000 Australians, who previously lived abroad, have returned home. On top of that, an additional 50,000 are expected to return very soon. These people have occupied a significant portion of the rental-housing supply, which means an increase in demand too. Vacancy rates for residential properties throughout Australia are very low and expectations are that they will remain low. An additional benefit right now is that financing a home is currently very cheap. That means that, as of now rent on an investment property typically covers mortgage repayments. In the rare event that tenants move out, there is generally less than a week before the property is occupied again. In fact, at AssetBase most of our client’s properties are being tenanted before going to market. That means investors are not left out-of-pocket for any significant period of time in comparison to commercial leases in which vacancy periods are typically between 6 and 9 months. That means investors in commercial properties have to cover their mortgage repayments until they find a tenant.
In conclusion, both commercial and residential properties are still very viable options for investors. They can both make you a tidy profit and both have advantages and disadvantages. But given the entry, repayment and vacancy costs, we believe residential real estate is still the most viable option for everyday Australians.