Commercial agents have seen an influx of interest from the residential sector as buyers seek new investment opportunities following the impending tax changes.
InvestorKit commercial buyer’s agent Chris Huxter said the tax reforms had gone beyond just a spike in demand, creating a behavioural change in investment.
“I would say it sparked a lot more conversation. It’s not creating demand out of thin air, but it’s definitely getting more interest from people that can afford commercial properties,” Huxter said.
“The sophisticated investors are starting to ask if commercial is the right move for their portfolio.”
While the tax reforms had created a sense of panic in the residential property industry, Huxter said the commercial sector remained relatively unscathed.
He said that with negative gearing not forming part of the typical strategy for commercial investing, as well as buyers purchasing within a trust or a company, most of the reforms would have little to no impact.
The four pillars of a successful commercial investment
Huxter said that investors should consider assets on their individual merits, rather than assuming that one type is better than the other.
“When you look at what makes a good commercial property, it needs to pass four different tests: lease, tenant, property, and market,” he said.
“Property and market dominate tenant and lease; they are more important because they influence the type of tenant you receive and the type of lease.”
He said while the property itself and the market demand were factors entirely out of investors’ control, they carried the most impact in an asset's performance.
“You want to see low incoming supply, low vacancy rates and tenants fighting over space.”
While investors had no control over the property or its demand, they could dictate the type of tenants or the terms of the lease.
The relationship between yield and risk
He said that while many investors prioritised cash flow when it came to commercial assets, high yields came with higher risk.
He said that commercial properties with a yield of above seven per cent were the highest risk for investors, as they usually involved compromising on at least one of the pillars.
“The question would be ‘am I willing to take on this risk for an 8.6 per cent yield when I could just go to a lower risk asset for 6 per cent where those four things are all superior?”
Additionally, Huxter said that to ensure they were getting the most out of a commercial asset, investors needed to conduct proper due diligence and receive the right professional support.
While a residential purchase would typically come with a short cooling-off period, commercial properties took substantially longer, with a typical process taking around three weeks.
“It requires a level of detail to go through the market, go through the property, interview the tenant, assess the lease, and check the outgoings. That takes us 21 days.”
“21 days gives us enough time to go to the property and allows our investors to be protected so we can leverage that due diligence clause and pull out.”
Top tips for a commercial pivot
Huxter said investors looking to enter the commercial space should be wary about the risks of purchasing a cheap commercial property just to enter the market.
He said that a cheaper asset could attract smaller businesses, which have a higher rate of not paying rent.
“So if you are going to buy a commercial property, buy something of quality.”
He said that most quality commercial assets started above $3 million, with a deposit plus costs requirement of over $1 million.
“You start to see more high-quality properties, which attract high-quality tenants, which attract strong leases and fewer instances of capital expenditure.”
“You are kind of in this sweet spot where you’ve priced out mum and dad investors, and you’re not as expensive as the institution, so you can get better deals that are a lot safer.”
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