Login
‘Pretty high risk’: Why one investor says to think twice before switching to commercial
As investors turn to commercial property in response to the federal budget changes, one former commercial agent is backing established Melbourne units for his yield play. Here’s why.
One former selling agent has warned investors against rushing into commercial property in today’s business environment, arguing that entry-level units offer attractive yields and diversification benefits that reduce the risk of tenant vacancies.
LEVR Group founder Josh Crealy said that while commercial assets can provide solid returns, they were often prone to business insolvencies that can lead to major arrears.
“I just think people try and pivot too early from residential to commercial,” he said on The Smart Property Investment Show.
He ultimately said investors needed to buy according to market cycles, identifying where each market sat and target locations with the strongest growth potential.
“When I started buying … I ruled out commercial because I could see the risk that was there with that in this cycle,” he said.
Here’s what investors should know:
Commercial: Not all it appears to be
While higher yields can make commercial property look more attractive, Crealy said the best opportunities weren’t likely to come for another 12–24 months.
As one disadvantage in the current market, he said commercial property tended to rely on single tenants occupying buildings, leading to higher risk for investors who were depending on one income stream.
“There’s no surprise that we’re in a bit of an economically unstable period, so with rates high, inflation high, unemployment’s going up, insolvencies of small businesses are rising,” he said.
Crealy said even the most diligent commercial tenants would be unable to pay rent if they fell into insolvency, and investors would damage their valuation if they had to re-lease at a lower rent.
Free investor loan check
Better property decisions start with smarter lending.
A free 15-minute finance check for property investors.
What are your lending goals?
Choose a goal to request a callback.
Ready to talk?
Book a 15-minute call →Finni Pty Ltd · Australian Credit Licence 384324 · Privacy
“Look at what happened to some commercial property in the Global Financial Crisis (GFC) era – some got hit really hard because there were a lot of businesses struggling now in that same breath,” he said.
Crealy said someone he knew bought a retail shopfront for a hair salon in Perth, paying around $1 million, but soon found that it wasn’t worth it when the tenant fell into arrears.
“They’re in court trying to get the money back. It’s a complete nightmare … the tenant didn’t pay,” he said.
He said investors who were committed to commercial property should instead consider higher-priced assets, which could offer multiple income streams and more opportunities to add value.
He pointed to an investor who bought a $22 million mixed-use property in Taren Point comprising four buildings, with the valuation increasing to $29 million post-settlement.
“That’s a $7 million uplift, and, at that high price, you’ve got less competitors, and you’ve got more levers you can pull,” he said.
However, Crealy urged investors not to assume that commercial was the next natural step, as the right asset depended on their financial position and the market cycle.
Units: The new portfolio booster
In contrast, Crealy said Melbourne units provided stronger opportunities to scale a portfolio in the current market, enabling higher borrowing capacity and solid underlying investment fundamentals.
He said affordable unit rentals remained in high demand as tenants sought accommodation within their budgets, to counterbalance the higher cost of living.
“I’m talking about older established units basically because there are a lot of people in these times that need $400–600 per week rentals and a roof above their head,” he said.
Crealy said Melbourne was particularly well positioned, pointing to falling unit supply, relative affordability and strong population growth as factors supporting the market.
He also said there was potential for solid capital gains, based on similar conditions in the past, when units he bought recorded growth of 70 per cent over four to five years.
“Is it going to be the same this time? Nobody knows exactly, but the fundamentals are lining up,” he said.
According to Crealy, investors also need to decide between purchasing multiple units as one block, sometimes considered a commercial investment, or buying a single unit.
According to Crealy, having multiple tenants in a unit block can spread vacancy risk compared with relying on a single tenant.
“You could have a block of six units that are renting out for $500 a week,” he said.
“The vacancy rates are so low, and there’s so much demand in this type of environment for these rentals that if you have one person leave, you’ve still got five other people, and then the one will lease out in a couple of weeks.”
Listen to the full episode here
Want to see more stories from trusted news sources?
Make Smart Property Investment a preferred news source on Google.
Click here to add Smart Property Investment as a preferred news source.