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How COVID has supercharged the appeal of commercial property

Aerial shot of Port Melbourne industrial precinct with Docklands and CBD in the background
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Industrial, logistics and warehouse properties have been strong performers for investors over the pandemic. Photo: Shutterstock

How COVID has supercharged the appeal of commercial property

Adding a commercial property to your portfolio is without a doubt the best way to diversify, lock down solid capital growth and improve your cash flow in 2021.

Adding a commercial property to your portfolio is without a doubt the best way to diversify, lock down solid capital growth and improve your cash flow in 2021.  

However, many are not experienced in commercial investing or don’t yet appreciate the sheer benefits of adding it to their portfolio. In our eyes that’s the biggest risk of all. 

Let’s look at how the pandemic has supercharged commercial property into a ‘property investor’s dream’, and why now’s the opportunity of a lifetime to invest in commercial real estate. 

Residential has hit a ‘yield ceiling’ 

A few years ago, we realised we had hit a ‘yield ceiling’ with residential property and that the highest cash-flow in Australian real-estate was locked away in commercial property.  

Gone are the golden days where you could purchase residential properties with (gross) yields of 6, 7 or 8 per cent or build a self-sustaining property portfolio based solely on residential.  

You simply cannot find these yields anymore.  

We hit a turning point and decided that if we wanted to continue receiving the strongest returns on our investments, then adding a commercial property or two to our portfolio, or shifting purely to commercial, was the only way to go. It’s been an absolute gamechanger.

The perfect storm 

The post-COVID climate in Australia has massively boosted the appeal of commercial property.  

Interest rates are low so cash is cheap, and high-quality commercial assets are now scarce due to increased demand (people have more savings because they’ve been forced to stay home and are now looking to put their money to work).  

All of these factors have contributed to a tightening of the market and have resulted in yield compression for residential property (capital growth), and is the reason that commercial assets are far outweighing the return on investment that residential can deliver. 

Highest cash-on-cash returns seen in almost a decade 

It is a fact that commercial property currently offers the highest cash-flow you will find in Australian real-estate. 

We are currently securing 6 per cent to 9 per cent net yields on the high-quality commercial properties we’re buying for our clients.  

However, when you look at the returns on your initial cash investment, the numbers are even better.  

We’re talking 25 per cent to 40 per cent cash-on-cash returns – something we’ve not seen in Australia since 2012.  

These numbers are the reason commercial property has caught the eye of sophisticated investors, not only in our own backyard but internationally, and has become a luring incentive for new entrants to the commercial property scene. It’s nothing less than a property investor’s dream. 

Why now’s the time to get into the commercial property market

  1. Money is cheap. With interest rates at an all time low, money has never been this cheap for buyers. Historically we expect to see a gap of 2 per cent between interest rates and yields, but currently we’re seeing an incredible 4 per cent gap. This means, right now, there’s the opportunity of a lifetime to get the best cash-flow returns you’ll ever see out of commercial property. 
  2. The best time to buy is always now. Don’t think of commercial property as a risky investment just because we’re in a pandemic. Sophisticated investors know how to identify an exceptional asset and at Rethink Investing, we only target the most resilient types of businesses. Our strategy of buying medical, logistics, and other essential services–type investments with strong tenants has proven to be very resilient. If you always make sure to purchase high-quality commercial assets (found off-market if possible), which are always positively geared, boast superior cash-on-cash returns and most prominently already have a secure and robust tenant, you’ll be successful.
  3. Pay your debt down to zero by 2031. Unlike residential, commercial properties have the potential to pay themselves off in just 10 years. After that, you are generating passive income, investing back into your portfolio or using the equity from your property to expand your portfolio. Hello financial freedom and early retirement!
  4. Earn the highest cash-on-cash returns in a decade. With 25 per cent to 40 per cent cash-on-cash returns, it’s imperative to take advantage of this lucrative opportunity by adding commercial property to your portfolio in 2021.
  5. Get into the market early. Although commercial property has long been a well kept secret amongst sophisticated investors, that’s starting to change. We’ve been receiving increasing interest in commercial property investing as it becomes more popular in the mainstream. If you can engage an experienced buyer’s agent and capitalise in this market before it fully takes off you’ll secure an incredibly lucrative investment for yourself, one that will continue to pay dividends as the years go on.

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