Commercial vs residential property investment

In Australia we have an obsession with residential investment.  The saying ‘safe as houses’ is something we’ve taken to heart, so if it isn’t a home on a quarter acre block, or an apartment, small property investors have looked the other way.

But as our residential investments are getting more competitive, and prices are relatively high, it really is time for smaller investors to look more broadly at what are some of the benefits of greater diversity in their portfolios.

So if you want to invest in property, here are some of the reasons why you should consider commercial property alongside residential.

Once, I would have said that before buying into commercial space you needed to be looking at spending in the one to two million dollar bracket.  That’s no longer significantly more than you need to spend on a lot of houses these days, so commercial properties are becoming – at least relatively speaking – more affordable.

You might also want to think about investing in commercial property because you already own two or three residential properties and you’d like a more diverse portfolio.

Another reason to look at commercial properties is that they tend to involve longer term leases so you can achieve more stability with your rental – though, obviously, harder for you to get out of a lease should you need to.

So, if we are talking commercial, that means thinking about retail, industrial, and other broader uses which might include strata office space, to be able to make sure that when there are downturns in residential markets or geographic downturns that your property portfolio is diverse and able to withstand those cyclical impacts.

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And there is a demand for this property.  For example, I’ve been observing that there is a new tier of renters and it is the small businesses of one to four people – incidentally biggest growth sector. These businesses are looking for small-scale strata office space and there is a real shortage of this property type in Sydney and Melbourne’s middle ring areas.

We are beginning to see some smaller projects being developed but it’s nowhere near satisfying the demand.

Industrial property also deserves some research.  Industrial yields have been very good, so it’s a matter of finding the right location.  Smaller strata industrial space which offers good parking and is positioned, say, close to a major shopping centre, would be attractive to a business renter hoping to become a supplier to that shopping centre.  It begins to make a lot of sense.

We are beginning to see a real focus on retail by small mainstream investors, many of whom plan to add value by incorporating apartments into these projects – which is a good idea.

So, you might be able to purchase a shop and, over time, build a couple of stories on top of the shop.  Again diversifying your portfolio.

One of the big differences between residential and commercial investment is that you need time to develop an understanding of the sector you are investing in.

Real property success requires diverse portfolios, not just diverse in terms of geography and housing type, but actually considering commercial property as well as residential.

If you are growing your property portfolio, I suggest you think how much commercial you should mix with your residential to optimise portfolio returns and to minimise risk.


About the author: 

Brian Haratsis is MacroPlan’s Founder and Executive Chairman. Brian is an economist and future strategist with over 30 years experience as an advisor to governments and major corporate clients throughout Australia and New Zealand. For more information or to discuss your property research requirements, please contact National Marketing Manager, Amy Williams on 02 9221 5211 or amy.williams@macroplan.com.au.

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