Residential investors are being urged to look into commercial property as a way of growing their portfolio and achieving their financial goals sooner.
During a recent episode of Inside Commercial Property – With Rethink Investing, founder and director of Rethink Investing Scott O'Neill explained why sophisticated investors should look at commercial property.
“I think residential has been so good for so many people for so many years, so there wasn’t really a need to look beyond your backyard in that department. Times are changing. The market has been pretty average since 2017 in many markets,” Mr O'Neill said.
Mr O'Neill told investors there’s a gap in the current investment market, with commercial property potentially solving the problem.
“It’s been flat and cashflow is not great, so people are licking their wounds on a lot of their investments and thinking, what next? The share market is all over the shop at the moment, so it’s hard to put large sums of money into that, property-related amounts into that,” Mr O'Neill said.
“Commercial is I think a really good solution. It’s harder to pull off, and that’s the other reason. There’s not much marketing on it because if there were 200 people all doing the same thing, like I have mentioned before, the stock out there worth buying is so little.”
Residential vs commercial growth
Despite the myths around commercial property not growing, Mr O'Neill points out quality properties in commercial outperform the residential market.
“This year, the growth out of commercial compared to the residential stuff, I’d say it’s about double what we’re seeing because commercial, it’s very yield driven and there’s a lot of yield compression going on at the moment,” Mr O'Neill explained.
“I’m calling this as almost like the free kick for our investors because you’re getting a real good cash flow upfront, but two years ago, we were buying in, say, Brisbane at 8 per cent, 8.5 per cent net yield.
“Those same properties could be sold back to the market on the same lease terms at 6.5 to seven years. People are paying more for the same rent, and it’s because money is getting cheaper, and that yield compression is not finished. We’re talking 20, 30, 40 per cent growth in some types of properties just from squeezing at the market.”
Getting out of debt sooner
While the returns are larger, Rethink Investment’s head of strategy Steve Palise noted the higher upfront deposits and strong cash flows mean investors are out of debt sooner.
“The light bulb moment for me was when I actually calculated if I put that cash flow back into the property on a 70 per cent loan, on a 7 per cent net yielding asset, you'll actually pay it off in 9.5 years, said Mr Palise.
“Getting a residential property, say you buy something in Sydney for a million dollars and it’s cost you 10 grand a year, you just hold the property, you’re banking on that property doubling to make the same amount of money without any positive cash flow on it. Commercial, why you keep the tenant, it’s in the bank. In addition to that, hopefully the property has doubled as well.”