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Investing? Consider commercial property too

Commercial property can offer great returns but you must tread warily.

Investors always need to be on the lookout for high-percentage returns and, traditionally, commercial property offers a better return than a house or a unit.

The downside of buying a shop or an office, however, is the entry cost.

Yet investors who've built a modest portfolio of residential properties are increasingly diversifying into commercial property.

It's also common today for couples in their 40s and 50s to buy a shop or office through a do-it-yourself superannuation fund.

Commercial property has some great plus factors. You get a secure, long-term tenant who pays the outgoings, including council and water rates.

Then there's the potential to redevelop, especially if you can acquire several buildings in a row.

So what are the fundamentals to look for? Valuer and a partner with the Opteon Property Group, Rob Fellows, says three factors — land value, the existing building and the calibre of the tenants — underpin the value of a commercial property.

"From an investor point of view you are trying to get those factors to line up," he says.

"The wildcard in all of this is town planning and what you can actually do with the property."

It's easy for investors to earn 6 per cent a year from a cash bank deposit, so there has to be the real promise of a future capital gain when you buy a property that's returning just 5 per cent.

You should concentrate on properties that allow for retail or another commercial activity on the ground floor and for apartments or office space on the first floor.

"If you're only getting 5 per cent on an investment then the rest has to be made up from the capital gain," Mr Fellows says.

"The capital gain will either come from the tenant's ability to pay more rent or your ability to add value by developing the property."

Other issues to consider are the impact that nearby shopping centres may have on a strip site, car parking and traffic clearways, the strip's shopper drawing-power and the potential of its air rights.

Corner retail sites often produce the best gains. They're not as hemmed in by other shops on either side and have better growth prospects.

Don't ignore old office buildings, either.

Domain.com.au via Brisbane Times
20 August 2011