Following The Money: Key Rules For Investors

The 2023 Wealth Report by Knight Frank the-wealth-report---apr-2023.pdf (knightfrank.com) found the appeal of commercial real estate clearly remains strong despite the economic backdrop. Close to a quarter of ultra- high-net-worth individuals (UHNWI) – those with US$30 million-plus in investible assets – intend channelling substantial investment funds into commercial assets across Australia and New Zealand over the course of this year according to the report. And about 18 per cent of global UHNWI plan on, or are already doing, so via debt funding or a real estate investment trust (REIT).

This year will be the strongest for “cross-border private capital since 2019” Knight Frank researchers found, with nearly 40 per cent of respondents considering investing in commercial property outside their country of residence.

Just over half of respondents were channelling less than US$1 million into the market and one in 10 aimed to pour US$20 million or more in terms of investment sums.

Such findings are no doubt encouraging news for both experienced investors and those entering the market for the first time. Opportunities continue to grow across the board, with Australia’s regional markets seeing close to $10 billion in transactions in the year to Q1 2023 according to data from Ray White Commercial. Even so, in the current economic climate punctuated by rising interest rates, advisors are warning investors remain vigilant in their approach. Real estate expert and author of the Property Wealth Blueprint, Rasti Vaibhav said it was an important time for both experienced investors and market newcomers to stick to some basic principles.

“Many investors usually start their journey with residential property to generate capital growth,” Mr Vaibhav said. “Then they move on to commercial property to help boost yield and provide a stable income during their retirement years. It’s crucial for these types of investors especially, who are often more familiar with purchasing residential properties, to understand some critical differences regarding this sector.”

Crunch The Numbers Well

It may be a cliché but when it comes to investing in commercial property, the devil is truly in the detail. A comprehensive feasibility study is a must, one that factors in repayments, lease income or other revenue streams, vacancy risk and additional owner costs. “Maintaining strong positive cash flow is crucial in the face of rising interest rates,” Mr Vaibhav said.

Commercial property investor Helen Tarrant, who grew her first $10-million-plus portfolio in five years, has explored yields and returns available in many regional areas in her recently published book Cashed Up With Commercial Property. In Albury, for example, $1 million investments are generating a 12.75% return “with over $30k positive cashflow up for grabs each year”.

“The best opportunities at the moment are in regional townships where there are large commercial businesses being established to support the growing population,” Ms Tarrant said. “In addition, these regional businesses often have more cash coming in than going out, establishing a sustainable long-term growth opportunity for investors.”

Pick The Best Spot Possible

Location is one area that applies just as strongly to both residential and commercial property. Be forensic in the examination of requirements of your potential business tenants, Mr Vaibhav advises. “The location of a commercial property is vital,” he said. “For instance, drill down into whether the retail and office space you are considering for purchase is as well-located for employees and customers as it initially appears. Industrial assets and specialised properties, like service stations, need to be logistically sound.”

Then Choose The Right Tenants and Agreements

As the success of the tenant directly impacts on a purchaser’s income, high quality tenants will make the property more valuable, Mr Vaibhav said.

“Similarly, an excellent long lease with a quality tenant can add value to the property itself making it a far more appealing proposition to buyers looking at trying to mitigate their risk as best they can.”
The key steps to take here – and well before making an offer on any commercial property Mr Vaibhav says - are evaluating lease durations, rent escalations, tenant creditworthiness and rental income stability.