Commercial property is any non-residential property used for commercial profit-making purposes. Commercial is a real estate term that covers industrial properties, retail properties (from the corner store to shopping centres) offices and hotels.
Commercial property and residential real estate are two very different investment vehicles. The values of commercial properties are yield driven rather than (owner occupier) demand driven in residential property and fluctuate over time related to yields available from other investments and the prevailing interest rates.
While residential property is generally a high capital growth, relatively low yield investment on the other hand commercial property is a higher yielding but lower growth investment as capital growth is dependent largely on providing additional lettable area or rent increases in a short supply market place.
As most commercial rental increases are usually pegged to the rise in the C.P.I. your rent increases, currently below around 2% each year stifling your capital growth unless short supply.
When the economy falters and businesses languish commercial property tends to be out of favour and drop in value.
There are also a number of other key differences between the two property types.
- Commercial properties tend to yield a higher return than residential properties – usually between 7% and 9% net in Broome compared to residential properties which yield 4.5% to 5% gross (then you subtract rates taxes insurance etc.).
- Professional investors require a higher rental return to make up for this type of property’s inferior capital growth and longer potential vacancy factors
- With commercial properties the tenants usually pay all the outgoings such as rates, taxes and insurance.
- Because your tenant conducts their business from your commercial property, they tend to look after it better by maintaining the property including painting it and most leases require the tenant bring the property back to its original condition at the end of the lease.
- Leases for commercial properties tend to be for longer periods, often 3 to 5 years as opposed to the one year lease you can get from a residential tenant.
- However when vacancies occur in commercial properties they are often for considerably longer periods than the week or 2 you may have a residential property vacant in an active market.
- Lenders will usually only lend up to 70% of the value of commercial properties.
- Interest rates for a loan on commercial properties are usually 1% or more higher than for residential properties however low interest rates generally also lower the yield being demanded by the investor.
- Investors need significantly more equity to purchase a commercial property. Partly because a bigger deposit is required and also because a good commercial property usually costs significantly more than a house or apartment.
- The cycle for commercial properties is different to that for residential properties and is more dependent on the general economic factors than the residential market.
- The lease required for a commercial property is a much more complex and is often prepared by a lawyer.
- It’s easier for the average investor to pick a top performing residential investment. Most know what to look for in a residential
- Goods and Services Tax is applicable to commercial property, both at the sale and when receiving rent in most cases.
- Sellers and or Landords must be registered to collect GST.
- Retail and office properties are often a good investment for good businesses that can lease their own property through a SMSF or Trust (consult your accountant of financial advisor as tax implications or restrictions may apply).