How to invest in commercial property - a beginner’s guide

The Savills Blog

How to invest in commercial property - a beginner’s guide

Have you ever considered investing in commercial property? Our Beginner's Guide details key points to help you get started. 

Pros and cons of investing in the commercial property market

PROs

  • Strong rate of return on capital invested: Commercial property generally provides higher ROI (8-10%) 
  • Secure income stream 
  • Typically structured rental increases are included in lease agreements  
  • On average longer lease period. An average lease period for commercial averages from 3-10 years, whereas average leases for residential averages 6-12 months 
  • Price appreciation: lease agreements often contain a term for rent increases in accordance with inflation 
  • In most cases, leases are transferable
  • Tenants normally add value: incentive to make improvements. Improvements raise the value of your commercial property, which may lead to a commercial property owner able to charge higher rates to later tenants  

CONs

  • Untenanted periods: Loss of income due to vacancy
  • Difficulty to repay debt due to income reduction  
  • Fit-out contributions and incentives (rent-free periods) 
  • Broader economic conditions impacting tenants ability to pay rent (economically vulnerable)
  • High exposure to outgoings (land tax, council rates, water & electricity)
  • Capital works required to upgrade the building. Façade, roof, services and complying with BCA standards. 
  • Change of laws governing operating hours (for example lock out laws)
  • Capital gains tax and transaction costs

What should you look for in your investment?

1. Location

2. Size 

3. Building condition and certification 

4. Is it vacant or leased 

5. Length of lease and structured increases

6. Supply and demand in the suburb/area 

7. Is the current tenant paying market rent?

8. Rental growth projection 

9. Vacancy rates 

10. Outgoings 

11. Planning controls and develop ability 

12. Analyse the surrounding tenants or neighbouring properties

13. Demographics servicing the tenure or future tenure of your investment, it's import to analyse statistics, population, average household income and household structure

14. Surrounding infrastructure and future upgrades  

15. When was the property was last sold? 

16. History of capital growth 

17. Recent comparable sales, compare what properties like yours have sold and at what price

18. Current competition, consider the price of other properties that are currently on the market and how they compare to yours

19. Unique selling points, what distinguishing features sets your property apart from the rest?

How do different sale methodologies work? 

Each property is different and knowing which method of sale to use depends on numerous variables.

With the contract drawn up and the agency agreement signed, it’s best to decide on your sales strategy and the type of sale process. Your real estate agent will outline these options and will suggest the most appropriate for your property and market conditions.

Expressions of Interest

An expression of interest is a marketing campaign to sell a property without a price with all the benefits of an auction while being able to assess all offers in a private setting.

Auction

An auction is when prospective buyers gather to bid on your property. The highest bidder at the end of the auction becomes the successful buyer, provided the bid matches or exceeds your reserve price and the successful bidder purchases the property on an unconditional contract.

Private sale

This is when you set the price you would like your property to sell for, and your real estate agent negotiates individually with prospective buyers to achieve a sale as close to this price as possible.

Off-market

An off-market transaction usually relies on the agent talking to potential buyers one at a time, with no marketing of any kind to the public.

How to find a tenant

Targeting potential tenants… The objective of marketing your property is to spark interest in potential tenants and draw them to the opportunity. The following channels provide a commercial property owner the best platform to secure a suitable tenant for their holdings. 

  • Signboards – Property signboards are the local cornerstone of your property marketing campaign. Large format and sitting front and centre, the signboard signals your property is for sale and attracts the attention of all potential buyers
  • Brochures – Showcase your property’s unique selling points and stunning photography with a set of brochures to engage potential buyers
  • Digital advertising – Property listings on realcommercial.com.au and commercialrealestate.com.au target a massive database of potential buyers. There are additional advertising options on both of these platforms that your real estate agent can discuss with you
  • Print advertising – Extending your campaign into print can bring more page views to your listings. Options can include advertising in local, national and international publications and specialised targeted publications

For even more insights and tips, download Savills Sellers Guide.

Recommended articles