Understanding the fundamentals of commercial property

When most Australians think about property investing they rarely consider commercial property.

But property analysts say there are several advantages that commercial property offers over retail property.

The most striking is the income yield, or rent.

Scott O'Neill, chief executive of commercial property advisory firm Rethink Investing, says that net yields for residential property in Australia after expenses such as insurance, maintenance and rates are just 1-3%.

Commercial property typically pays net yields of 5-7%, partially because tenants cover costs such as rates and maintenance.

Commercial property covers three broad categories - retail, office and industrial, the last of which includes logistics centres and warehouses; factories; data centres and medical centres.

O'Neill said that industrial property has produced higher capital gains than residential property in the past 15 years.

"I'm also drawn to the deep diversification opportunities within commercial property. In recent years, I've concentrated heavily on medical facilities and essential retail like supermarkets," he says.

"Residential property is largely a homogeneous asset class where it's difficult to outperform the market, whereas commercial investing rewards specialised knowledge and sector expertise, creating genuine opportunities to beat broader market returns."

Commercial property requires more research and expertise than residential property and was until recently seen as the domain of sophisticated investors. However, O'Neill says that in recent years he has seen first-time investors buy commercial property due to the low yields and high prices of residential property.

Individual investors can get into the commercial property sector via direct ownership or by investing in a commercial property fund, which can be either a listed or unlisted.

Direct investment offers better leveraging, complete control over decisions and sometimes a higher return on investment due to paying no management fees. It also requires no hands-on involvement.

"However, funds provide access to larger, institutional-grade assets with stronger tenant covenants and more stable returns, plus professional management," O'Neill says.

"You need to choose on whether you prioritise maximum returns or stable, professionally-managed exposure."

Sameer Chopra, head of research, Pacific and ESG, Asia Pacific at commercial real estate agency CBRE, says one advantage of investing in funds is that it can provide more diversity through holding a range of assets and provide access to assets that individual investors can't afford.

For instance, a typical logistics centre sells for $20 million to $50 million; office buildings are generally priced from $100 million to $2 billion; and shopping centres cost $200 million to $2 billion.

Those assets near new infrastructure tend to appreciate in value more quickly. For instance, shopping centres and offices near newly-built railway stations or logistics centres near the new Western Sydney Airport have good prospects for growth, he says.

Commercial property is likely to perform strongly in the near future, Chopra says.

"What's particularly attractive right now is commercial property can be more interest rate sensitive, and when interest rates start to decline, which they are, the capital growth in commercial property can be, can be really good," he says.

"You can have very outsized kind of returns right from commercial property."

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