A Commercial Advantage
There’s nothing quite like simply having a chat to expand your mind and broaden your view.
I jump at every opportunity to engage in conversation – particularly with property professionals bringing varied skills to the field.
It’s a particularly handy practice for a quantity surveyor. If I lived solely in the world of depreciation analysis and cost estimates, it would be impossible to, you know, have an actual discussion with normal people in a social setting. Their reactions would undoubtedly be stifled yawns and stolen glances at a watch face.
There’s always something to be learned by sharing knowledge. In fact, recent exchanges with my bricks-and-mortar friends have revealed an important shift in the status quo.
They’ve confirmed that a substantial number of residential investors are now looking to buy commercial property.
I think it’s a savvy idea
Buying a commercial holding can seem daunting to anyone who’s only dabbled in houses and units. That’s not surprising as, for many decades, commercial holdings sat above a mythical glass ceiling of complexity. That rarefied air where only high-income individuals or institutional investors dwelt.
But getting past the velvet rope and landing a commercial property isn’t so tough – and the benefits are plenty.
Here’s what I’ve discovered about the pros of commercial property.
You knew I’d open with this powerhouse reason, didn’t you my QS friends?
While we see deprecation benefits for residential investments being tinkered with by legislators ad infinitum, commercial depreciation upsides remain relatively untouched.
The big move was the May 2017 budget changes which stated you can only claim Plant and Equipment depreciation items for residential property on either brand-new construction or assets you install yourself.
But that didn’t apply to commercial at all. Did I hear someone say ‘loophole’ (well… kind of)?
In addition (in case you’re looking for some insomnia-inducing reading material) there are around 280 pages in the ATO guidelines listing out claimable Plant and Equipment items. But here’s the thing – only about two and half pages of those refer to residential assets. The rest deals with mostly commercial elements. So, pound-for-pound, commercial property has greater potential deductions.
The lowdown is that for about the same cost as a residential investment, you can acquire a commercial holding that will have substantially better deductions.
If you’ve been living on the planet Mars, under a rock, buried deep in a cave without internet access, you may have missed recent stories about the tough lending environment. They describe how the brouhaha of the Royal Commissions combined with APRA restrictions have kept even low-risk-profile residential investors from acquiring meager funds.
While this has eased a little of late, many will tell you it’s still pretty hard to get approval out of the bank for a house or unit.
But how about for something more ‘exotic’?
I was surprised during a recent conversation with a business banking associate from one of the majors. I said we had clients looking for commercial investments because getting finance approval in this sector is so much easier than for residential – despite having plenty of equity for either type of purchase.
“Absolutely it is,” was his reply.
It seems while residential investors are being firmly targeted in an effort to create a more rigorous banking system and free up stock for first homeowners, commercial investors are being left pretty much alone.
This is a primary reason investors want commercial offerings, but industry experts who deal daily with clients looking to build residential portfolios confirm the flight to cashflow is gaining momentum.
It’s the next phase in their client’s investment strategy – particularly if they’ve built up equity in their portfolios during the hot Sydney and Melbourne price run.
But the other drive toward high rent return is continued low wage growth. While the idea of owning high-growth assets is attractive, people are feeling a bit light in the weekly pay packet. In fact, who can afford to service the debt on a low-yield asset when your wage has been standing still?
As such, smart buyers are looking at ways to ensure they’re investing so as to boost (or at least not drain) the household budget.
Not too many years ago, mention commercial property and images of monolithic structures with multiple tenancies might have come to mind.
But how we work has adapted over the decade – just look at the increase in co-work spaces and remote employment where you can dial in rather than commute.
Along with this change has come the metamorphosis of commercial property that’s on offer.
Nowadays, there are a number of smaller storage-shed type commercials or strata-titled warehouses that are at similar price points to residential stock. And, as mentioned, they’re much higher yielding than residential – and that’s on net return rather than gross too.
The availability of the adaptable stock means there are options for everybody keen on becoming a commercial landlord.
There are downsides too of course. Extended vacancies in commercial can be a concern and the costs of property management and other professional fees tends to be higher but, overall, commercial makes sense.
My big tip though is to make sure your advisors – whether it be a lawyer, property manager or quantity surveyor – have some experience in the commercial realm. There can be nuances involved that will work in your favour, and the right advisor will unearth these as part of their excellent service.