Property

The returns from commercial property are higher than those from residential, but so too are the risks.

Whether you are addicted to the bricks and mortar of a stand-alone asset or more inclined towards equities, funds or syndicates, commercial property can offer excellent returns, provided you are wise with your investment.

The global financial crisis, although it started in US housing, shook commercial property. Real estate investment trusts listed on the Australian Stock Exchange suffered most, but values dropped right across the sector.

In distress

Tenant demand for offices, shops and warehouses remains subdued in those cities and towns not benefiting from the resources boom. Almost 30 per cent of commercial property advertised for sale is distressed, according to Herron Todd White.

The big risk in commercial property is that while the tenants are good when in place, paying for many of the outgoings, they can be hard to replace if they leave.

So what are the opportunities? In well-secured real estate, yields can be so much higher than the cash rates on offer from the banks.

(The average yield on REITs is more than 7.5 per cent even when they retain 25 per cent of their income. Yields on good retail property would be lower, and higher on offices and industrial.)

A sure bet

Shops and supermarkets are the closest you can get to a fail-safe commercial property investment, according to Burgess Rawson director Graeme Watson.

“Retail is still a favoured property class, especially when it comes to the essentials of life,” he said, pointing to chemists, takeaway food stores and supermarkets.

The challenges are the downturn in consumer spending, e-retailing, the expansion of the major chains, and, as always, picking the right location.

Hard to find

The success of industrial property investment depends largely on the strength of a tenant and there are plenty of vacant B-grade assets on the market on the eastern seaboard.

High-quality distribution centres and office/warehouses in the $3 million to $10 million price bracket are in short supply owing to competition from established players and owner-occupiers.

Suburban offices and strata offices in the central business district also attract private investors.

Quality and lease covenant are king. The mainstay of suburban office tenants – small business and larger operators with a parent company in Europe or America – put new space requirements on hold for years after the onset of the GFC and many are only now re-entering the market.

Assets with high green star ratings near transport or road infrastructure are still the most sought after, but vacant property can be nearly impossible to fill if your tenant leaves.

Fancy a beer?

If it’s a more glamorous, yet truly high-risk asset class you’re after, then the pub sector might be worth a look, as many operators were forced out of business during the GFC owing to high debt levels.

“Look for assets with high underlying property values, good, high traffic locations near shopping centres, train stations or large carparks – defensive-style assets,” says CB Richard Ellis pub agent Joel Fisher.

The listed A-REITS are the way to invest in the best shopping centres, warehouses and office towers.

They are easy to access. Prices fluctuate with the sharemarket but the sector does appear to be regaining its defensive low volatility.

The other way to buy commercial property is through syndication.

Most private syndicates require an investment of about $200,000 and offer a return of about 9 per cent on your money, but they provide little control over the asset.

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