Should mum and dad investors go investing in commercial ?
For $500,000 a self-managed superannuation fund investor in Sydney's central business district's hot commercial property market could afford to buy an area smaller than the inside of a shipping container, according to analysis by national property valuers Herron Todd White.
The same investor can buy a Darwin office suite with a solid tenant and long-term lease within walking distance of all services and facilities, the analysis of the nation's commercial offers for mum-and-dad investors shows.
"Office property is often considered the realm of the high-end landlord, but for mum-and-dad investors, there are ways to break into this sector," says Angeline Robinson, Sydney's commercial director for Herron Todd White.
She says investors need well-resourced independent advice about the investment, financial, tax and legal implications of buying commercial property.
Typical investors are attracted by portfolio diversification and 5 per cent-plus yields in a low interest rate environment.
"Rising property prices, particularly in Melbourne and Sydney, increases their capacity to leverage," Robinson says.
There are 570,000 self-managed super funds with $654 billion under management and 1.1 million members, according to the Australian Taxation Office.
The drivers of the growth in commercial property investment are self-employed and professionals buying their own workshops, factories, chambers or surgeries, despite the risk of compounding loss if the business fails.
Real property holdings surge
There has been a more than six-fold increase in SMSF real property holdings in the past 13 years to more than $100 billion, according to the ATO. Total property borrowing by the funds is about $20 billion.
The maximum a SMSF can borrow to purchase a commercial property is typically about 60 per cent of its value, which means a big deposit and additional costs, such as stamp duty.
SMSF advisers recommend scheme members diversify away from their own businesses as insurance against its potential failure, which could derail retirement savings.
There are, of course, risks involved. Commercial property is higher risk than residential because vacant periods between tenants can be anywhere from six to 12 months.
Returns on commercial property are also more closely linked to the ebbs and flows of the broader economy than residential real estate.
That means it is an even tougher decision for an investor who is not buying their own work premises and is driven by hopes of higher returns from a commercial tenant than from a comparable residential tenant, fixed interest fund or savings account.
Where to buy
In terms of where to buy, according to the national property clock, Melbourne and Newcastle are approaching their market peak and Adelaide, Brisbane, Hobart, Perth, Cairns and Darwin are at the market bottom.
Sydney is a rising market and Canberra is starting a recovery.
Melbourne
CBD vacancy of about 6.4 per cent is the lowest after Sydney and continues to fall, particularly in the top end.
Headline rents, which is the asking rent before deductions and incentives to encourage a tenant, are rising but some incentives might be needed to secure tenants, says Jason Stevens, a Melbourne-based director.
Primary locations outside the central business district include South Melbourne, about 3km south-east of the city, and Richmond, about 4km east. Entry level is typically less than 100sqm for strata space, demand is strong and yields are in the range of 5.5 per cent to 6.5 per cent.
Secondary locations are located in the outer metropolitan areas, such as Glen Waverley, which is about 26km south-east of the city. Vacancy rates are higher than for the CBD and stock levels are relatively high.
"There are still good opportunities in secondary locations if there is a good tenant in place," says Stevens.
Sydney
Property prices and rents have soared during the past two years for commercial properties in the central business district, CBD fringes and secondary office markets, says Robinson.
The amount of commercial property on offer in the CBD market has been reduced by an increase in apartments, redevelopments and construction of the Sydney Metro, she says.
Prices for secondary office precincts, such as the northern beaches suburbs of Belrose, Warriewood and Brookvale, 18km from the CBD, are only just beginning to recover from over-supply and the downturn following the 2007 financial crisis.
Entry level for Sydney CBD is smaller strata title offices, from between 10sqm and 75sqm, in B and C grade offices, such as 147 King Street and 368 Sussex Street. Prices range from $200,000 to $500,000 and yields range from 5 per cent to 7 per cent.
Similar offices in areas such as Belrose and Brookvale sell for about $400,000 with yields of around 5.5 per cent to 7 per cent.
Canberra
Low interest rates, robust demand and abundant supply have created opportunities in the city and inner suburbs of Kingston, Manuka and Braddon, which is about 2km from the city centre, says Sandra Howells, a commercial property valuer.
Properties range from 50sqm offices to units in 200sqm complexes with yields of about 7.5 per cent.
Secondary locations include Deakin, Turner and Philip, which is about 5km south-west of the city. An 83sqm unit recently sold for about $310,000 in Deakin, where there is demand from media and private organisations.
"No new developments are due in the short term, which will put pressure on the current office space available," says Howells.
But there is space in mixed-use developments at ground and first floor levels in the $250,000 to $500,000 range.
South Australia
Entry-level office space is chiefly limited to strata suites where yields in the CBD range from 4 per cent to 8 per cent.
"This market has been relatively stagnant, rental growth has been limited and vacancy within the CBD is high," Chris Winter, an Adelaide-based director of Herron Todd White, says.
Suburban offices within a $500,000 budget are typically former homes converted to office use along main roads.
"Escalating outgoing costs and limited rental growth is eroding investment returns," says Winter.
Queensland
Investors have a choice of semi-industrial, low-end strata, suburban office parks and fringe office buildings, according to Alistair Weir, Herron Todd White's commercial director in Brisbane.
Below $500,000 the market is dominated by strata titled office suites with popular postcodes including Mount Gravatt, about 11km south-east of Brisbane, and Cannon Hill, about 11km east.
"The CBD strata market is very slow with a relatively low volume of transactions," says Weir.
Darwin
"There are opportunities aplenty but all have significant risks," Terry Roth, a Darwin-based director.
The vacancy rate in Darwin is above 22 per cent, mostly with larger buildings.
"There is also an oversupply of smaller scale space with many businesses downsizing," he says.
Perth
Values are down across the board, says Enzo Evangelista, a Perth-based director.
For example, rents have halved in Subiaco to about $200 per sq m.
"With a glut in the office leasing market and a flight to quality, strata owners of B and C grade strata office suites are doing it tougher than those holding new suites in recently completed developments", he says.
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