Mapping out the next stage of your property journey
Many of us start out investing in residential property, but this is not always where your property journey should end.
Australians are keen property investors, with around 2.2 million of us owning an investment property - usually a house, apartment or townhouse.
However, there is a lot more to property than residential dwellings, and as we get older, there are compelling reasons to add commercial property to the mix.
1. A strong source of regular income
When we start our investment journey in, say, our 20s, 30s and even 40s, we can afford to focus on investments that deliver capital growth. At this age, most of us have a regular pay packet that provides money to live on, and investing is all about building wealth.
It's a very different story as we move into, and through, retirement. At this stage we rely on our investments to provide regular income.
It still makes sense to hold investments that will deliver capital growth. This ensures our wealth keeps pace with inflation. But the need for passive income increasingly becomes a priority.
While commercial property has the potential to generate capital growth, its income-producing potential is often what holds key appeal with investors.
As a guide to the strength of that income, data from Colliers shows current rental yields on the main classes of commercial property are:
- 5.27% industrial property
- 5.79% office property
- 5.75% retail property
That's a lot higher than 3.8% rental yield for residential property.
Not only that, but this residential yield is also gross before expenses, meaning the net return may only be around 2.5%.
In commercial leases, the tenant usually pays many of the property's outgoings, giving investors a more generous 'net' (after costs) yield.
2. Long leases provide longer-term income
Adding to the attractions of commercial property for yield-focused investors, the lease terms are usually substantially longer than for residential properties - often spanning upwards of five-years-plus.
This can be highly beneficial in providing a regular income stream without the need to renegotiate lease agreements on a regular basis, allowing investors to map out their income and cash flow.
3. Portfolio diversification
Commercial property adds an extra layer of diversification to a portfolio, helping investors smooth out volatility and gain exposure to different markets. In this sense, commercial property can play a role in every portfolio - not just as we age.
How to invest in commercial property
As with all investments, there are potential downsides to commercial property. A key risk is the possibility of longer vacancies. This risk can be substantially reduced by selecting quality properties in prime locations that attract successful businesses.
The catch is that these types of properties come with a price tag beyond the reach of most individual investors. In most markets, it's rare to find quality commercial assets for less than $5 million - and even then, most investors wouldn't want to invest such a large amount of capital into a single investment.
The solution can be to invest via a managed property fund. This allows investors to pool their capital, enabling the purchase of high quality commercial assets, often leased to blue-chip tenants such as multinational or publicly listed companies.
The syndicated structure of a fund means the capital requirements for individual investors are far lower than buying commercial property directly. As a guide, investors can purchase units in some of our funds at Westbridge Funds Management from as little as $50,000.
This allows pre-retirees to start tapping into the commercial property sector, so that a passive source of income is up and running from day one of retirement.
Looking beyond residential property
Residential property is a great investment when we are in the wealth accumulation phase of our lives. It's not always such a rewarding asset as we age. Worst case scenario, low rental yields can see retirees fall into the asset-rich/cash-poor trap.
For anyone heading into retirement, I would recommend taking a closer look at commercial property. As a source of passive income, commercial property can fill the income gap that many people face when they hang up their work boots.
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