Investing in Commercial Property

The term commercial property has three broad sub-categories; industrial, retail and office property.

Successfully investing in commercial property requires a totally different set of selection criteria compared to residential property.

Compared to residential property commercial property offers investors a higher yield. Currently yields on commercial property are between 6% and 10% of initial capital outlay compared to between 4% and 6% on residential property.

Another advantage of commercial property is that the tenant pays all outgoings e.g. rates and maintenance. Also, tenancy agreements are for a substantially longer period in the case of commercial property.

This might all sound rosy for commercial property however residential property performs better from a capital growth perspective. Also, with commercial property there is a risk of longer vacancy periods.

Commercial property investors seek a sound lease agreement. Central to this is a tenant that has a viable business. This will ensure the tenant will honour rent payments and the tenure of the lease.

Quality of location is essential for the success of a residential property. This is also the case for commercial property however a different set of criteria is applied to commercial property.

In the case of industrial property, investors will look for a property that is situated close to major freeways, shipping ports and airports. A factory or warehouse should also be functional to satisfy the needs of a business.

Highly sort after are factories and warehouses with high entrance heights and maximum internal floor to ceiling width. These features provide easy ingress and egress of machinery and enhance storage capability.

Retail property investors rank a high profile and successful adjoining tenant (anchor tenant) highly. This is because they are able to draw in consumers which results in flow on benefits for all adjoining businesses.

Investors looking to purchase an office look for a prestigious location. This will appeal to many prospective tenants and therefore drive rental increases.

The above information is a broad overview of commercial property. There are many variables that need to be considered before investors should consider taking the plunge into this rewarding yet volatile asset class.

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