When to consider commercial property

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Australians love bricks and mortar - but there are times when a commercial property can make more sense than residential housing. We look at five reasons why it could be time to consider commercial property.

1. You're priced out of the residential market

It's no secret housing values have soared in the last year. That's seen median house values in Sydney and Canberra push past the $1 million mark, with Melbourne not far behind according to the latest CoreLogic data.

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If that sort of cash is beyond your reach as an investor, a commercial property may be a more affordable prospect. A quick hunt around shows it's possible to pick up office space, retail space and even small industrial warehouses for below $300,000.

2. You're chasing high yields

One of the beauties of commercial property is that leases tend to run for much longer than residential property - usually 3-5 years. This provides greater certainty of income, with the sweetener that yields tend to be higher.

As a guide, the latest Raine & Horne Commercial Insights report shows yields are currently sitting between around 4-7% depending on the type of property and the location. In comparison, CoreLogic says gross (before costs) yields on residential housing nationally are 3.1% for houses and 3.7% for apartments.

3. You own a small business

Investing in your own business premises offers security of tenure plus a chance to control leasing costs. And Angus Raine, Executive Chairman of the Raine & Horne Property Group, says today's historically low interest rates are fuelling the rise of the owner occupier in commercial property markets.

He explains, "In many areas it is now cheaper for businesses to own rather than lease their premises.

"Not only is this underpinning high demand for commercial properties - especially those sold with vacant possession - it is also putting a squeeze on leasing markets as fewer properties are available to let."

4 You're looking for a source of regular income

You may choose to invest in commercial property indirectly through a listed property trust or an unlisted fund. Both have a track record for paying regular income as well as a chance to access a cross-section of commercial properties.

Many A-REITs and unlisted funds pay distributions monthly or quarterly underpinned by regular rent receipts. This can be a far more regular source of income than, say shares, which only pay dividends twice a year.

5. You don't want the ongoing costs of residential property

In a residential tenancy the landlord wears many of the ongoing costs including repairs and maintenance. Not only can it be a hassle managing these expenses, it also lowers net (after costs) yields.

By contrast, in the commercial market, it is more typical for the tenant to pay many of the property's regular expenses. That means more of the rent goes straight to the landlord, with less of a drain on cash flow to keep the place in good shape.

Bear in mind, commercial property is regarded as a higher risk investment than residential housing. Leases may be longer, but vacancy periods can also be more protracted. So it's important to weigh up the pros and cons to make the choice that's right for you.

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A former Chartered Accountant, Nicola Field has been a regular contributor to Money for 20 years, and writes on personal finance issues for some of Australia's largest financial institutions. She is the author of Investing in Your Child's Future and Baby or Bust, and has collaborated with Paul Clitheroe on a variety of projects including radio scripts, newspaper columns, and several books.

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