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Higher yields, higher risks: The commercial property lesson for SMSF investors
Commercial property may offer SMSF investors stronger yields and faster debt reduction, but understanding vacancy risk, costs, and cash flow will be critical before making the switch.
As some investors pivot to commercial assets following the self-managed super fund (SMSF) borrowing changes, they’re being urged to ensure they educate themselves and understand the market’s nuances.
Access Wealth managing director and founder, Dory Senior, said commercial property had long attracted SMSF investors due to its typically higher rental yields and the potential to reduce debt faster.
Following the removal of residential SMSF lending, he said commercial properties had become the logical alternative, prompting many to reassess their long-term strategies inside their funds.
“In the right circumstances, commercial property can potentially pay itself off much faster than residential, but it is a much more advanced investment,” he said.
Between rental yield and super contributions, Senior said many commercial assets can be debt-free in 10 to 15 years, enabling investors to potentially hold an income-producing property as they approach retirement.
Apart from the government’s ban on SMSF borrowing, Senior said investors were also drawn in by the commercial market's lower entry price points, with some assets ranging from $500,000 to $800,000.
“New commercial assets allow investors to scale faster because the lower entry price points leave more liquidity inside the fund,” he said.
Additionally, he said rental guarantees, which were viewed negatively in residential property, were a legitimate tool in the commercial sector, giving investors certainty during the initial lease-up period.
However, for those considering pivoting, Senior said it was important to have buffers in place and a clear understanding of cash flow, rather than depending on best-case scenarios.
“The point is not to make the numbers look pretty but to understand whether the client can comfortably hold the commercial asset if things aren’t perfect,” he said.
According to Senior, vacancy was the biggest variable in commercial property and required more rigorous modelling than residential investment.
“We overestimate costs, build in vacancy buffers, assume higher interest rates and allow for council rates, water rates, insurance, management fees and maintenance – even when the property is brand new,” he said.
Senior said the real test for investors was whether the rental income and long-term growth potential of a commercial property justified the costs and risks of holding it for 10–15 years.
“For many clients, once you model the property properly, the question becomes much clearer,” he said.
Ultimately, he said the long-term drivers in commercial property remained strong, amid tight supply and strong population growth.
“People still need somewhere to live, and businesses still need somewhere to operate,” he said.
Before making any decisions around super, he told investors to speak to a financial adviser specialising in SMSFs to ensure the strategy was right for them.
He said while investing in commercial property was not complicated, it required more education and professional advice than residential assets.
“If you understand the cash flow, the vacancy risk and the buffers required, new commercial property can be an incredibly powerful long-term investment.”
“But investors must seek professional advice to determine whether it is appropriate for their circumstances.”
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