I believe that most people would be well-served by investing in various asset classes, including shares and property. I do not believe that any one asset class is superior. They all have their pros and cons which you can balance out in a diversified investment portfolio, which could include commercial property.
Commercial property does have some wonderfully attractive attributes but it’s important to introduce it into your portfolio at the right time (stage of life) and of course, invest in the right asset using the right methodology.
I will explain this in a two-part blog. This first part will provide an introduction to commercial property. The second part will consider how to successfully invest in this asset class.
Attraction to commercial property
Most investors are very familiar with residential property as an investment option. As I have highlighted in this blog many times, residential property is a growth asset because it provides most of its total return in the form of capital growth and proportionately very little income.
One of the main attractions to commercial property is that it typically provides a higher level of income, which may be particularly attractive if you are close to retirement, or you already own a few residential investment properties.
Types of commercial property
Commercial properties can have a varying array of attributes and no two properties are likely to be identical. That said, there are three broad categories of commercial property:
§ Office: An office building is usually a multi-level building that has multiple tenants. These buildings are typically situated in central, well-established locations (CBD or suburban hubs), which adds to their scarcity and tends to drive capital growth.
§ Retail: this includes retail shops in suburban shopping strips, mixed-use premises, and specialised properties such as service stations and restaurants. Because these assets are typically located in high-demand locations, they tend to generate lower rental yields.
§ Industrial: this includes industrial sheds, bulky goods centres (bunnings) and the so on. These assets tend to be located in outer, fringe locations and as such may offer higher rental yields.
How does commercial differ from residential?
Given most people have an understanding of r
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