If you're considering investing in real estate on the Northern Beaches, you may immediately think of residential properties like apartments. But what about the opportunity offered by commercial real estate?
In this interview we speak with Clarke & Humel's Michael Burgio about the reasons why investing in commercial property may be a better option than residential property and how it can diversify your portfolio.
Find out how the returns compare to residential property, the pros and cons involved, how much you can expect to pay and how to get the most from your investment.
Michael Burgio, Clarke & Humel
Michael, can you start by outlining where the main commercial property hubs are on the Northern Beaches?
The predominant area for commercial property is Brookvale where you'll find a lot of industrial units and office complexes. Moving further north, you'll come across other areas like Warriewood and Mona Vale. And in the west, we have Frenchs Forest and Belrose.
In suburban neighborhoods like Cromer or Fairlight, there are scattered commercial properties available such as small convenience stores, restaurants and coffee shops, as well as a little bit of warehouse and office space.
To give you some perspective, Cromer has about 300 commercial properties and Fairlight would have less than 100. Meanwhile, Brookvale has around 2,000 and Belrose around 800.
How is commercial property categorised and which category is best to invest in?
The main commercial categories are industrial warehousing, retail and office space.
If you’re buying the property to use for your own business, then you’re going to prefer one type over another. But if you’re buying it as investment, then it’s more about looking for the right return profile rather than property type.
You also need to consider whether you want to own the land or just the building. Some purchasers only look for freehold investments, which is similar to a buyer who prefers a house on its own parcel of land. Others, however, are happy to buy a property that is part of a strata complete – just like buying a residential investment unit.
Who buys commercial property on the Northern Beaches?
The majority of commercial property on the Northern Beaches is sold to locals. Entry-level office spaces and retail shops are often bought by ‘mum and dad’ investors, while business owners tend to buy properties for their own use, especially when it comes to properties like Brookvale’s factories.
I think it’s a good idea for people who are looking to buy their second or third residential apartment to consider commercial property instead as a cash flow play. We are seeing an increase in these types of investors who tend to lean towards office complexes, which are similar to strata and residential purchases.
How is commercial property priced? Is it based on square meterage?
Pricing commercial property can be complex, but the primary determinant of its value is the rental income it generates.
For example, a shop generating $50,000 in rent would be worth about $1 million at a 5% rental yield. However, if the tenant moves out and a new tenant rents it for $30,000 a year, the property may now only be worth $600,000.
Factors such as rate per square metre and land value may also be considered, but these are typically only considered in freehold purchases where there is land involved.
What kind of returns can people expect out of commercial property?
The value of commercial property isn't just in capital growth – rental income plays a significant role in its return profile.
For instance, if a client bought an office for $220,000 ten years ago, and it's now worth $280,000, they may not feel like it's had the best growth. But, if they were receiving $20,000 in rental income each year (net), they would have earned an additional $200,000 over the ten-year period. Combining this with the property's current value means their investment is now worth $480,000.
In terms of rental yields, for a strata property that is used for office or retail, you should aim for a net return of 5.5% to 6.5%. This is after all the outgoings have been paid and applies to assets with a lease of three years or longer. If you are considering a property with a lease that is only six months or a year, then you should aim for a return of 6.5% to 7.5% to compensate for the re-letting risk.
When it comes to industrial properties, the demand is high and many business owners like to buy them because of the benefits of owning a property, such as injecting cash into their super and being able to play around with expenses. But the high demand means that net yields can be as low as 4 – 4.5% for a strata property, and even lower for a free-standing factory.
How much does commercial property cost?
For entry-level investments, there are storage units available on the Northern Beaches for between $100,000 to $200,000. Additionally, you can find offices in Belrose starting from around $250,000, while modern factories and commercial properties that are around 20 years old start at around $800,000. These are some of the typical prices you can expect.
How does managing commercial property differ from managing residential property?
One key difference is vacancy rates. Whether you buy the best or the worst commercial property, it typically takes between one to six months to find a tenant. This is very different from the residential mindset where we expect it to be rented quickly.
With commercial property, there may not always be someone looking to rent the type of property you have. It may take a few weeks to even get an inquiry, so it’s important to be patient. You can’t just drop the rent and expect people to come running, it doesn’t work that way.
To minimise vacancy, proactive management is necessary. With commercial leases, tenants typically give three to six months' notice before the lease ends. This gives owners the ability to negotiate with their existing tenant or start the search for a new tenant early.
Another difference from residential property is that if you have a problem with your tenant, you can’t have it resolved under the Residential Tenancies Act and the NSW Civil and Administrative Tribunal. In commercial property, lawyers handle any legal issues.
For these reasons, it’s important that you work with a property manager who understands the unique dynamics of commercial property. Don't hesitate to have different property managers for your residential and commercial properties as it makes sense to have specialised expertise for each type of property.
Any tips for buying well when it comes to commercial property?
Firstly, I recommend engaging a buyer's agent who specialises in commercial properties. They can help translate the jargon and provide valuable knowledge.
Secondly, target areas you're familiar with or areas with high-density commercial property. Research the rental prices in the area to ensure you're paying a reasonable price and consider why you're buying the property and what return you're looking for. Remember, higher yields in remote locations might look appealing, but they can come with higher vacancy rates. So, it's essential to understand the relationship between yield and vacancy when making an investment decision.
Want to get in touch with Michael? Head to https://www.clarkeandhumel.com.au/about/team/michael-burgio/ to find out more