Episode Details

This is the second part of a two-part blog about investing in commercial property (you can read part one here). Now that you have a broad understanding of commercial property attributes, the next topic to discuss is how you can successfully invest in commercial property.

Why type of commercial property do I recommend?

Personally, at the moment I invest in commercial offices, and recommend the same to my advisory clients.

I do not invest in retail property because the profit margins in the retail sector have been under increasing pressure and landlords are not immune to the impact of these pressures. Rental yields are already relatively low in the retail sector, and they could be compressed further, which will adversely affect asset values. Overall, I don’t find this sector attractive.

Whilst the high rental yields that industrial property offers is certainly very attractive, there are two downsides. Firstly, industrial properties tend to have a single tenant (i.e. no tenant diversification) which could lead to protected periods of vacancy (3-6 months is not uncommon). Secondly, these assets tend to provide very little (no) scope for improvement.

I am more attracted to office buildings because it offers tenant diversification i.e. an office building might have 20-40 tenants, so the likelihood of a materially lower income due to vacancy is lower. In addition, office buildings can provide scope to add value to the asset. There are two primary ways to do this.

Firstly, you can ensure the building offers the same amenities that newly built towers do. That can include a refurbished foyer/atrium (so its attractive for staff and clients to visit), end-of-trip facilities (such as showers, bike racks and so on), offices that are already fit out and ready to be occupied, etc. These capital improvements are all aimed at achieving a higher rent per sqm.

Secondly, you can improve the landlord’s relationship with the tenants. Ensuring tenants are well looked after and satisfied with the building is critical in reducing tenant turnover/vacancy and maximising rent. Weighted Average Lease Expiry (WALE) is a key metric that is used with office buildings to measure the strength of the property’s income stream. Increasing the WALE, reduces the capitalisation rate, which increases a buildings value.

Investment option: Direct ownership

One option is to purchase a commercial property to own directly i.e. you own 100% of the building, just like you would do with residential property. Of course, one downside with this option is that if you have a limited budget, you may need to compromise on the quality which is never a good idea.

Whilst it is highly dependent on the type and location of the property, I suggest that you need a budget of at least $2 million to invest in a satisfactory commercial property.

One of the advantages of hav