Thursday 22 August 2019

Commercial Investment Series - Your Commercial Investment

As concluded in our last posting, commercial property is a lucrative investment opportunity.

Commercial property can provide strong returns and a stable income to an investor. It can also provide generous tax benefits including substantial depreciation allowances. An investment in commercial property can provide an investor with leverage on borrowings as well as providing the opportunity to add value to their investment through renovations and re-development which can attract a stronger calibre tenant and higher rental.

There are of course negatives associated with any investment and you are wise to seek financial advice from your accountant, legal advice from your solicitor and market advice from your agent.

Now that you have decided to wisely invest in Commercial Property, what drives the value of the property you are looking purchase?

Largely, the purchase price will be driven by its rental returns.

For example, the estimate value of a large office property of 500sqm, that is leased for $150,000pa, based on a yield of 7.5%, would be $2m.

The formula is:

Rental value / yield = property value

The expected industry yield for office property is 6.5-7.5%, with the average lease demanding around $350sqm gross. The lower the yield the higher the property purchase price and the lower the risk.

*These figures will vary depending on whether you are investing in the office, warehouse, industrial or retail sector.  For the purpose of this article our figures and information are based around office investment.

Other factors you should also take into consideration when purchasing include:

• Required capital works – new air conditioning units or roof can be an expensive outlay

• Lease length and quality of current tenant

• Potential for capital growth

• Potential for redevelopment

• Taxation and legislative environment

• The location including, local infrastructure and supply and demand, demographics, population growth

• Economic environment including retail spending

• Interest rates

A vacant property will generally carry a substantial discount versus a leased property, especially if you are looking at it as a long-term investment as it could take a long time to lease the property.

As mentioned previously it is imperative you seek professional advice when looking to invest money in any asset.

 

Contact Your Commercial for further information on purchasing a commercial property investment, +617 3148 9901 or sales@yourcommercial.com.au