Is now a good time to invest in commercial property?
Property investors are driven primarily by ROIs, especially in today’s market. Yet combating inflammatory media headlines predicting the property bubble will burst can make it difficult for even the most level-headed of investors to come to grips with where and when it’s best to invest. The facts remain that good yields are still being achieved.
As the property market is cyclical, there are still good commercial property investment opportunities here in Australia. Some areas of the country may be experiencing a cooling market, but there are profits to be made in Melbourne if you are smart.
There is never really a ‘bad time’ to invest, only shorter and longer-term strategies in play. Capital growth can be expected from property investment, irrespective of market forces and changing pressures; history proves this.
The current commercial market
For those looking to invest, it’s worth noting that competition in commercial property is rising.
While interest rates are low, returns in Australia have plateaued in recent years. Retirees using interest gained on money sitting in banks to fund their day-to-day lives can expect a return of around 2 to 2.5% in interest, before tax. This is significantly less than previous years, especially for baby boomers, which means other avenues of generating capital are increasingly being explored – one of which is commercial property.
The increased investor interest and competition in commercial property is naturally placing an added pressure on the Australian market – this is a key challenge in the industry today that we at CVA have recognised.
The average commercial property yields are currently around 5 to 6%. The high demand from investors is a key driver here, but remember, the property market is constantly shifting. External forces play a major part in how the market fares and we could be in a different position by the end of the year.
However, it’s not all about the yields! Although high returns on capital are what many clients say that they’re after and strategising for optimal yields are a fundamental aspect of a successful commercial property portfolio, it is important to recognise that they aren’t the be all and end all.
This is particularly true in an industry that shifts frequently – it is dangerous to be distracted by short-term returns. For example, investors are often attracted to country properties for the higher prospective returns, but in the long term this isn’t always the best strategy as it can take longer to find tenants. We recommend that investors take the time to understand what and where they are investing, coming to grips with the local market.
A better bet than residential?
With office and industrial space in Melbourne currently in high demand, now more than ever is an ideal time to turn your attention towards commercial property and consider it as a viable investment solution.
The demand for commercial property means once you have invested, it’s likely you will find tenants quickly. Work spaces of all shapes and sizes are sought across the state and there are many commercial opportunities that include mixed use dwellings. These provide the ability to lease the space to multiple tenants resulting in multiple incomes.
In addition, tenant stability tends to be stronger compared to residential properties. Leases usually last between three and 10 years, because the tenant has often invested a lot more into a commercial property and would prefer to stay in the one location.
In general, commercial property is more successful as a long-term investment as it generates a higher yield over time. This rings true in today’s market; those who are willing to wait it out in Melbourne will see the benefits. Avoid the fear mongering news headlines and focus on the fundamentals – there will always be opportunities in property.
Anthony Carbone is the Northern Region Director at CVA Property Consultants.
Anthony began his career in real estate in 1984, moving to the commercial and industrial sector in 1985 and then joining CVA in 1995.
His record of success is reflected not only by exceptional Sales and Leasing results, but also by the proportion of clients who return to Anthony whenever they require advice for commercial or industrial property or wish to sell or lease their property.
