COMMERCIAL SPACE BOOMS

Commercial property may not be the most obvious place to park your money but financial experts believe investors should be looking at it.

With business confidence picking up, investment opportunities in commercial property are now greater than in the residential market, with yields nearly three times as high.

One advocate is Hewison Private Wealth director and private client adviser Chris Morcom. "Commercial office property is again being considered as a quality investment, but retail investors have been slow to get in on the action," he says.

A person's largest single asset is usually their house, so when it comes to property investment, they think of buying a house, he says.

"But with rental yields for quality commercial property now as high as 8 per cent per annum compared with the 2 per cent to 3 per cent yields being experienced in residential property, it's a good time for investors to add commercial property to their portfolios."

As a direct investment, commercial property is good for individuals and works well within a self-managed super fund for business owners, as they can capture the lease income as superannuation. But he says like any investment it must provide diversification. "Regardless of the quality of the property, any single asset portfolio is a high-risk option." For a high-growth investor, Rogers says, a direct commercial property should make up only between 10 per cent and 20 per cent of your growth assets in property. As a starting point, he suggests speaking to a real estate agent or a buyers' agent to identify the type of property you want. "It needs to reflect your capital growth and your income needs," he says.

If your predominant need is income, you should look at the potential yield you get from that property.

"If you are fully exposed in capital -- that is, you have got $100 to invest and you are spending the full $100 -- you need to look at the ongoing management costs for that property and the potential maintenance issues, because you are going to have to come up with that cash as the property owner," Rogers adds.

More broadly, investors should also look at the return profile and characteristics of the property, such as the existing tenant and the lease duration.

Property expert Rowan Wall believes the best place to look for commercial property now is in the depressed parts of the market, which he cites as anywhere outside the big cities where the turnover is low.

He did that recently and ended up acquiring a real estate agency in Batemans Bay on the NSW south coast, on a yield of 5 per cent. "It's fulfilled everything I was looking for," Wall says. "It gave me ongoing cashflow, serviced its debt, but it also gave me a dream of potential personal use five to 10 years down the line, and the marketplace was depressed."

CB Richard Ellis director of city sales Gavin Lloyd says when it comes to commercial real estate, "stick to the basics, offices". "The CBD, I think [is] really probably the best area."

He believes the best spot now is city strata office units. "You will buy a strata office in the city at the moment [on] anywhere from 7 per cent to 7.5 per cent [yield] in the $500,000 to $1 million price range," he says. "We are forecasting on top of that, you are going to be getting [capital] growth running at about 5 per cent to 6 per cent. So your total return is going to be in the order of 12 per cent."

He also suggests small office strata warehouse units, particularly in the south Sydney precinct. "The advantage there is you are going to get a slightly higher yield, probably 9 per cent to 10 per cent," Lloyd says. The entry point is from about $600,000. Capital growth in south Sydney should be between 4 per cent and 5 per cent a year for the next couple of years.

If you are looking at suburban markets, he suggests retail office property such as bank branches. But the retail strip should be in a good catchment area, he adds.

Hewison recommends four vehicles investors can use to add commercial property to their portfolios: syndicated funds; listed property trusts; unlisted property funds; and self-managed super funds. On syndicated funds, it says "pooling multiple investors together . . . can provide individuals with the ability to buy high quality commercial property".

Listed property trusts provide investors with access to commercial property at what seems to be reasonable value, it says, while unlisted property funds provide a wide variety of choice. It points out, though, that unlisted funds are fairly illiquid vehicles, meaning you have to wait until the property is sold to exit.

As for SMSFs, Morcom says one of the best strategies is to use your super fund to buy your own business premises if you're confident in the future of your business.

For small retail investors who have limited funds to buy a direct commercial property asset, Rogers suggests investing in good quality listed property trusts or a hybrid managed fund, which gives you an exposure to the listed trusts as well as direct property.

COMMERCIAL v RESIDENTIAL

The yield on a residential property is lower than commercial. Commercial yields are about 7 per cent, compared with residential's 3 per cent.

With commercial property, you are buying long-term tenancy security. Typically, tenants take up leases of four to five years, with options. They also sign up to fixed rental increases of about 4 per cent a year.

Residential tenancies generally last between six and 12 months and the tenancy turnover rate is higher.

With commercial property leases, the tenant pays most of the outgoings: council rates, water rates and insurance. Residential tenants only pay for their own electricity, gas and water bills.

If you have a dispute with a residential tenant, the law is on the side of the tenant. With a commercial tenant, the law is more balanced.

The deposit required for a bank loan for commercial property also tends to be higher, at about 30 per cent of the property value. That compares with residential where it's closer to 10 per cent of equity.

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