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Maximising opportunity through commercial investing
Commercial property could be the missing piece in investor portfolios, but inflated rents and misleading yields could leave buyers facing costly valuation shocks. Here is what investors need to know before making the switch.
With more investors looking to enter the commercial property market to continue growing their portfolios, understanding the intricacies of the asset class has become pivotal to success.
Having started his career in commercial sales, Arvon Property Group director Andrew Havig said investors were underutilising commercial property and could unlock stronger returns by knowing when to make the switch.
“The philosophy for us is that we feel that residential and commercial both fit into a portfolio,” Havig said.
“Resi is more commonly in that early to middle stage when you’re building equity, and commercial is awesome for that back end when you’re looking for passive income and cash flow.”
Additionally, Havig has grown his own portfolio from zero to 24 properties in six years, balancing capital growth and yield rather than prioritising one over the other.
“Growth is what gets you to your goal, but you need that yield at the same time for sure,” he said.
Navigating the commercial switch
Given the changes in market conditions, Havig said that commercial properties were a strong option for more seasoned investors seeking to balance growth and yield.
“In this market, we are buying retail, industrial, some medical and childcare as well,” Havig said.
Before transacting on a commercial asset, Havig said that buyers needed to ensure they understood the potential yield and rent, and assessed vacancy risks.
He said that while a property may look good on paper with a high yield, it could be significantly above market rent, posing a real risk of remaining vacant if the tenant left.
“You might think you are buying it at the right price because of the yield, but because the rent is inflated, you actually might be paying 50 per cent more than you should,” he said.
“It doesn’t present any real issues while a tenant is in there, but as soon as they leave and you’ve got to go back to market, naturally those tenants are coming in and offering market rent. So the value of your property can drop significantly.”
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In addition to vacancy risk, Havig said that an above-market rent could also create a valuation risk, as valuers would have to assess based on the going rate.
He said that not understanding the difference between net yield and market yield posed a risk to investors, as it could cause their entire valuation to fall short.
“You might think you’re buying it at a 6 per cent yield, but it might be a market yield of 3 per cent, so you are going to have a big valuation shortfall,” he said.
The importance of research
Because of the volatility of the commercial property market, Havig said that it was important to research before transacting.
He said buyers needed to ensure they conducted proper due diligence, checked for special levies, understood comparable rents and sales, and assessed how long it would likely take to re-lease the asset.
For investors looking to stay in the residential market, Havig said Melbourne units are attractive because of their high yields and relative affordability.
“Within the residential world, we love the Melbourne apartment play at the moment,” Havig said.
He said that after more than a decade of underperformance, affordable units in the Victorian capital could still be a strong play for investors, provided they targeted the right areas.
While Havig said that he felt Melbourne units and commercial properties were his highest priorities in the short term, that didn’t mean that opportunity couldn’t be found in other markets.
He said that Perth and Brisbane’s fundamentals remained strong, and he was “keeping a close eye” on certain markets across NSW, Tasmania, and Victoria.
Listen to the full episode here
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