Commercial Property ─ A How-to Guide

Acumen Finance’s How-to Guide for fresh-faced commercial property investors. The dos and don'ts when stepping into a volatile, risky marketplace which will easily make or break the savviest investors.

Nathan Daly
October 15, 2020

Commercial Property ─ A How-to Guide

Commercial property is a hot commodity and, while investors of time-past have primarily looked to residential property as a source of consistent, profitable yields, modern ones are now looking to capitalise on the commercial side of the property market. The risks are higher and heavily dependent on the economic strength of the nation, as well as the property climate at any given time, but the rental return can be stronger, assuming your commercial property provides all of the facilities and features and attracts the right tenants.

Getting Started in the Commercial Property Space

If you’re looking to get into the commercial property market as an investor, you should know that the commercial sector is made up of three primary categories: office, retail, and industrial space. Regardless of what you invest in, you need to be aware that successful commercial property investment is dependent entirely on your knowledge of the complexities of the Australian market ─ which can be volatile and risky. You will also need to understand the relatively unique financial system and requirements, alongside the options available when it comes to leasing and property management.

If you understand all of the given factors, you’ll be well on your way to success. They act as a solid foundation of knowledge which will impact your choices when it comes to commercial property investment and, often, decide whether it’ll be a fruitful investment or not.

Now, the team of experts at Acumen Finance is going to walk you through the process of investing in the commercial market as a beginner, step-by-step, to ensure that you can keep your head above water when you dive face-first into the deep-end! Here are the key considerations to take into account whether you’re looking to invest in large or small commercial property.

The Commercial Property Drivers

You probably won’t be surprised to find out that the key driver of growth in the commercial property market isn’t so dissimilar to the alternative, the residential market ─ demand. It isn’t quite the same, mind; the money is good only if several economic factors allow consumers to indulge in their commercial needs. That is why a strong or booming economic position is an absolute fundamental foundation for profitable commercial property investment.

When it comes to economic growth, commercial property demand undergoes a domino-esque effect. As the economy grows, logistics and transport companies start to experience the first signs of growth as the demand for the raw materials and resources needed to manufacture goods increases. Parallel to this growth in domestic manufacturing is a drastic increase in the importation of goods from the national and international marketplaces and, more often than not, a drive for more space by organisations.

The knock-on effect sees stocks in logistics and transportation companies begin to rise as a result of the increased business. The increase brings higher earnings, an increased need for staff and more job openings. Then, the demand for commercial property or space gradually rises to sustain the increased numbers. In essence, the increased business leads to higher demand in warehouse space, followed by retail, and in the end, office space.

Local Infrastructure Developments

When you’re looking for the right commercial property, make sure to scout out the surrounding areas and figure out if there are any upcoming developments on the horizon. Potential infrastructure upgrades can massively boost an entire region or area, like, for example, the opening of the M7 bypass around the western outskirts of Sydney. With its opening, the demand for commercial warehouse property around the outer ring increased because they were near the exits to the new bypass.

If the land is cheap and it has access to great roads, you may have a gem on your hand ─ after all, transport companies don’t want to have their facilities out in the back-end of nowhere.

Population Growth and Demographics

Shop by location projection; if there’s strong growth in the local population, there’ll be more demand across the board for all sorts of services. As new housing developments pop up, commercial necessities are created too.

If you find commercial property in an area where a big building firm has the rights to land for property development, just think about what the future inhabitants will need ─ food shops, clothing outlets, eateries, leisure areas, small industrial support services, and workplaces to support the local economy.

Demographics also come into play under this consideration. If you take a look at the demands of Gen Z and millennial members of the population, you’ll find that there is an increased demand in closer-to-home lifestyles, with flexible workplace scenarios ─ with that, many companies open up small offices near suburbs for ease-of-access. While, at the same time, you’ll likely find that young families are in need of top-quality childcare facilities and ‘baby boomers’ have an increased demand for healthcare services.

Worth noting and tying into the overarching narrative, is the fact that, with an increase in population growth in areas, retail spending will also go up, which drives up the demand for warehouses and facilities to support the previously listed necessities.

These are key considerations.

Interest Rates

Always consider the current interest rates when you’re looking to invest in commercial property, as they can affect the financial benefits and deficits drastically. The rates are set by the Reserve Bank of Australia and are used to control or manage the levels of inflation across the nation. When the Bank chooses to increase the interest rates, growth will slow and the cost of money becomes higher. As rates rise, spending by the consumer slows, and businesses find themselves growing at a lesser rate ─ subsequently, dropping the demand for their services.

If, however, they slash the interest rates, consumer spending increases as costs become lower in relation to income, outgoings, and cost-of-goods. And, the commercial space begins to boom once again.

Financing the Fixture

So, there are some essential considerations for you. You may be asking how you would finance the whole investing experience, though. Or, you may ask, how you would connect with the potential tenants when you do own commercial property. After all, it’s not every day that you try to jump into the commercial property market. Don’t worry, though. We’ve got the answers for that, too.

Normally, when it comes to capital investment, the Big Four banks will lend an investor up to 70% of the value that your commercial property holds. That said, the value is usually determined by the yields that the building with bring in, not the actual value of the bricks-and-mortar. On top of that, as you likely know, post-Global Financial Crisis (GFC) and the most recent banking scandal, caused the traditional banking system to tighten its purse strings, and the major banks are now highly regulated and far less generous when it comes to development finance, construction finance, and commercial mortgage lending.

There are some alternative options though, in the form of Tier 2, non-bank, and Tier 3, private lending firms, which fill voids in the market that are less regulated or entirely unregulated, where the traditional banking system cannot or will not risk entering through fear of financial fallout or further scandal and regulatory discipline. Both Tier 2 and 3 lenders are far more flexible than Tier 1 banks and can provide investors with a wider array of personalised financing options.

If you’ve conducted your research, found your ideal property and feel that you’re ready to jump into the commercial property investment arena in pursuit of your pot of gold, the team of specialist financial aggregators at Acumen Finance is on-hand to help. We host a great team of economic enthusiasts who are dedicated to connecting clients with the right sources for financial backing. If you’re looking for interest-only loans, development finance, construction finance or commercial mortgage lending, get in touch today, and we’ll let you dip your toes in our lucrative pool of sophisticated investors.