Office Buildings – Are they a good investment?
Residential property investment has long been popular among Australians, but far fewer venture into commercial property – like office buildings. While residential real estate may be more familiar, there are many benefits of commercial property investment, which is why it’s worth considering as a viable investment option. In recent times, we’ve seen strong demand for offices, coupled with short supply in some areas, which may help to make it a profitable investment. In this article, we explain why it may be worth considering commercial property investment as part of your property investment strategy, but remember to talk to your financial planner and your mortgage broker before you go ahead!
The pros of commercial property investment
Commercial property investing can offer significant cash flow benefits. Some commercial properties offer rental returns of more than 8 per cent, compared to the current median rental yield across the combined capital cities of 3.32 per cent (based on CoreLogic data). What’s more, commercial properties usually offer greater rental certainty due to the long-term nature of leases. Commercial leases often run for between three and 10 years, and agreements usually contain a term for set rental increases in line with inflation.
With commercial properties, there are also fewer ongoing expenses involved. Tenants usually cover most maintenance, rates, insurance and body corporate fees, unlike with a residential property, where the owner foots the bills. Another perk is that if the tenant puts in a new fit-out at their own expense, the improvements may increase the value of your property without it costing you a cent.
The cons of commercial property investment
It can sometimes be difficult to find new tenants for commercial properties, so as an owner, it’s important to be prepared to cover the expenses if the property is untenanted for an extended period.
Economic factors can also heavily impact on the health of a commercial property investment. For example, economic downturns, high unemployment or poor business confidence could affect demand. That being said, research and choosing the right commercial property in the right location can usually mitigate these risks, just like with residential property.
What should you research?
As with any property purchase, research is key to finding the right investment opportunity. Be sure to research local prices and market conditions, any council restrictions or zoning regulations that could affect your investment, and upcoming infrastructure developments.
In terms of location, think about the property attributes your tenant might desire. Is it in close proximity to transport hubs? Car parking? Perhaps it’s close to other complimentary businesses? Always remember the rules of supply and demand – it’s best to make sure there isn’t an oversupply of similar properties in the neighbourhood.
What are the benefits of choosing an office for first-time commercial property investors?
Office buildings may offer a less daunting entry point into commercial property investing for first-timers because of the strong demand at present. According to the Colliers International Office Demand Index (Quarter Four, 2017), Australia’s major office markets are set for a strong start to 2018, on the back of increased demand and activity in 2017.
Colliers measures demand in terms of demand and supply per square meter. In the final quarter of last year, office property markets nationally recorded a 19 per cent year-on-year increase in enquiries (demand), from 415,737sqm in the last quarter of 2016, to 492,947sqm in the final quarter of 2017. Increases were seen across all segments of the market and overall, there were 942 deals for 785,252sqm of office space in 2017. Ask us for a copy of the report if you are interested!
For some investors, buying commercial property such as an office can be a sound investment strategy. If you already own residential investments, expanding into commercial property investment may allow you to diversify your portfolio and generate an attractive income. If you’d like to find out more about your finance options, please speak to your mortgage broker. Commercial property finance can be more complex than residential finance, but your mortgage broker can walk you through the process and find a commercial property loan that ties in with your unique financial circumstances and goals. Please call today!
The information provided is general information only and has been prepared without taking into account your objectives, financial situation or needs. We recommend that you consider whether it is appropriate for your circumstances. Your full financial situation will need to be reviewed prior to acceptance of any offer or product. This article does not constitute legal, tax or financial advice and you should always seek professional advice in relation to your individual circumstances. Subject to lenders terms and conditions, fees and charges and eligibility criteria apply.