Before making an investment in the commercial property sector, it’s important to be aware of market dynamics such as the risks involved, leasing arrangements, property management, and financing arrangements. A proper understanding of these factors will help you make the right decision at the right time when it comes to choosing a commercial property for investment purposes.
The most important market driver that you have to develop an understanding of is the demand for commercial properties. Population growth and other economic factors determine the demand.
When the economy grows, it boosts transportation businesses due to an increased demand for material used in manufacturing goods. This eventually leads to more jobs. Similarly, the demand for warehouse space also increases, followed by retail and office space.
Inflation is managed by controlling interest rates. If Australia needs to slow down economic growth, the Reserve Bank of Australia increases the interest rates. As a result, companies experience slow growth and consumer spending also goes down. The slow growth eventually affects the demand of both residential as well as commercial properties.
Development of Infrastructure
When there is infrastructure developed, the demand within the commercial property market goes up. For example, when the M7 bypass was opened around the outskirts of Sydney, the demand for warehouse property also increased. Good infrastructure and cheap roads encourage transportation companies to shift to nearby warehouses.
The population plays a vital role in the commercial property market. For example, when an influx of people move to new location, the opportunity to build new suburbs arise within that area. Due to our frequently changing lifestyle, you will now begin to find plenty of offices within suburban areas.
Areas with high population growth are in need of more services. When a new suburb is formed, it gradually starts growing with the development of grocery stores, shopping malls, hospitals, schools, and other facilities. Therefore, population affects the demand for a commercial property in the sector just the same.
Financing a commercial property is more complex compared to a residential property. Normally financial institutions allow you to borrow up to 70 percent of the property price. Therefore, aim to have at least 30 percent down payment with you.
Some banks specialise in commercial properties and it can be better to go with their services as they are more experienced in the complexities of the commercial market situations.
It’s commercial agents who manage commercial properties. Instead of working as residential real estate agents, they serve their duty as ‘dealmakers’. Not only do they attract businesses by offering them attractive deals, but also offer rent-free periods.
When you plan to buy commercial properties, investment structure matters a lot. For example, if a group of 5 people are interested in buying a property, it is better to use self-managed superannuation fund (SMSF). This means the fund will make an outright purchase of a commercial property. SMSF also has a number of tax benefits for investors. Therefore, the investment structure is very important in this case.
When making an investment in a commercial property, be aware of the following risk factors:
• Changes in Infrastructure – The major infrastructure changes within the area where you plan to buy a property. This can be appealing when making new commercial investment decisions, but it can also result in drawing a long-term tenant out of these areas.
• Supply and Demand – The supply and demand of a property is affected by how many people are buying and selling, or applying for a lease or breaking it. The price of a property may go up if existing tenants undergo expansion or upgrade.
• Size – It is easier to lease a small commercial property compared to a large one. Therefore, the size of a property also matters as it reduces the overall cost.
• Lease terms – The longer the term of the lease, better it is. When you try to look for a tenant, it might take you some time before you find the right one. It is quite common for people to experience long delays when it comes to finding an investor who wants to invest in the property.