Tips for buying: Office, retail, industrial
Property Professor Peter Koulizos explains the benefits of investing in commercial property.
Let’s go through the finer details of commercial property investment, deciphering the difference between office, retail and industrial properties.
Offices
Of the three main types of commercial property, offices offer the lowest yield and can be seen as a safer investment than retail or industrial.
This is because office tenants tend to stay in their premises longer generally than owners of a retail business, therefore offering greater security to investors.
If you’re looking to buy office property:
- Appearance matters. Businesses like to be in aesthetically appealing buildings. This includes the external appearance as well as internal look of the building. The tenant is often responsible for the internal cosmetic appearance but landlords need to ensure that the building appears up to date.
- Aesthetic entry. As many homes strive for the ‘wow’ factor in the kitchen or yard, the entry to the office building is where you should be concentrating your efforts. This attracts tenants in the first instance and puts them in the right headspace as they walk through the doors.
- Natural light. Workers in your average office building will spend most of their working day indoors. Views and natural light streaming into their space are in high demand.
- Proximity to other offices. Offices tend to do business with other offices. It’s no coincidence that lawyers’ offices are grouped together, usually near the court precinct, and banks are grouped in the heart of the CBD. If you’re looking to buy an office building, it’s safer to buy one in a sought after location.
Read more: Beginners guide to investing in commercial property
Retail
Location is crucial to retail property. It must be easily accessible and convenient for shoppers to get to.
The corner store is fast becoming extinct as the petrol stations and convenience stores offer more than just milk, bread and the newspaper.
Location is crucial to retail property. It must be easily accessible and convenient for shoppers to get to.
Strip shopping, where there is a row of shops on a main road, has seen a decline, but there are some strips which perform particularly well.
Bridge Rd, Richmond (VIC), Jetty Rd, Glenelg (SA), King St, Newtown (NSW) and Hastings St, Noosa (QLD) are just a few of the prime shopping strips in Australia. The rents are relatively high in these areas, as is the purchase price.
Regional shopping centres have become popular as lifestyle hubs rather than just a place to get groceries, offering the opportunity to go to the movies, try bowling, have a coffee, meal or even massage, as well as do your shopping.
If you’re interested in buying retail property in a suburban shopping centre, the anchor tenant is key to the success of the centre.
The anchor tenant is key to the success of the centre.
The anchor tenant is the one that occupies the largest space ,often the supermarket. The closer your shop is to the supermarket and the more pedestrian traffic you get past the door, the better the business will perform and the happier your tenant will be.
Read more: How to choose the perfect retail site
Industrial
Industrial property is the most volatile when it comes to returns. During the 1990s recession, yields were as high as 12% but they have halved in the intervening years.
The main reason industrial property returns are relatively high is that they come with a greater vacancy risk.
Factories can be vacant for years, waiting for an economy to improve and, more importantly, the appropriate tenant.
They’re also often constructed for a specific reason, such as building timber furniture, manufacturing mattresses or assembling car parts. If the timber manufacturer goes broke or moves, it could be a while before you find another timber manufacturer or business that can use purpose-built premises.
Factories are often created for a specific purpose.
It’s less difficult to convert a shop that originally sold woman’s clothes to one selling mobile phones or refurbishment an office neutrally for a range of different businesses.
If you want to buy industrial property:
- It should be easily accessible to trucks and semi-trailers (close to or on a main road).
- The roof of the building needs to be high enough to allow forklifts and trucks to pass under and doors/gates also need to be wide enough to offer access to large machinery.
- There should be staff amenities, such as toilets, small kitchen, and some space which can be used as an office.
No matter which form of commercial property you are buying, remember to always read the lease carefully – it’s your bible!
