When most people think of property investment, they tend to think of ‘negative gearing’ a residential home or apartment.
The “negative gearing industry” has been relentlessly promoting this for many years, and their messages are well known.
Of course, negative gearing involves losing money on your investment property (ie. negative annual profit) in order to minimise tax on other income. Then, the investor hopes that the asset’s value grows to eventually give an overall positive return.
As an alternative, commercial property investment exhibits some fundamental differences. To begin with, commercial property investments are generally structured to be positively geared – you make an income return on your investment funds.
What defines a ‘commercial property’?
A commercial property includes:
- office buildings
- industrial buildings
- mixed use buildings (retail/apartments etc.)
- retail buildings.
Potential advantages of commercial property investment include:
- Higher income yields – commercial properties generally show a greater level of income for a given property value, when compared to residential property.
- Capital growth potential is based on income growth potential and other measurable factors – commercial properties are often valued on the basis of the potential (and actual) rental return being achieved. Other relevant factors include economic activity, interest rates, and the commercial success of the area surrounding the property.
- Stability and consistency of income – longer leases. Whilst residential properties are typically held on short leases (often 12 months), commercial properties typically attract longer lease terms between three and 10 years, providing consistent and predictable income streams over time.
- Income growth – the longer leases of commercial properties usually allow for the rent to increase in every year of the lease, thus increasing the return on investment as the lease progresses.
- Maintenance – unlike residential investors, commercial investors have the potential to earn enhanced profit, with the lessee responsible for paying the cost of maintenance, rates and repairs on the property when the ongoing expenses are written into the commercial lease agreement.
- Reliable tenants – we have all heard stories of “horror tenants” in houses and apartments. Tenants of commercial properties, on the other hand, are earning their income from the property. Therefore, it is in their interests to keep the property in good order and to maintain good relations with the landlord.
- Diversification – commercial property investment can provide diversification across different asset classes and geographic locations, allowing the investor to add further elements of diversification into their portfolio. By diversifying their portfolio and investing in a variety of commercial assets, from retail to industrial, investors are also protecting their income and managing risk in the event of an economic downturn.
- Ability to collectively invest – the ability to own commercial property within investment structures, such as property managed investment trusts, allows investors to hold part of a larger asset and to benefit from professional management of both the asset and the investment vehicle, which will also be subject to annual audit.
As with all investments, commercial property investment is also subject to investment risks which must be managed. For example, the managers of the property must ensure that the property remains relevant to the leasing market which it serves. From a financial perspective, gearing must be monitored and maintained at appropriate levels.
Natgen provides clients with well-considered, carefully measured commercial investment opportunities, accompanied by professional advice from our experienced leaders. If you’d like to be notified of future investment opportunities, request an Investor Information Pack or contact us directly at firstname.lastname@example.org