Why More Investors Are Making Their First Commercial Acquisition

A year ago, most of the commercial enquiries we took came from investors who already owned several houses and wanted something different.

That has changed.

Through this spring, a growing share of the briefs crossing our desk have come from buyers making their first move into commercial property. Some are selling an underperforming residential investment to fund it. Others are using equity in the family home. A few are setting up their self managed super fund to hold a single, well leased asset.

The common thread is simple. They want income they can rely on.

What is driving the move

Three pressures keep coming up in our conversations.

• Holding costs. Rates, insurance, land tax and maintenance have all risen. In a residential investment the owner carries them. In a typical commercial lease the tenant does.
• Thin residential yields. Many investors are funding a monthly shortfall and relying entirely on growth. After a softer stretch for Brisbane values, that bet feels less comfortable.
• Regulation. Tenancy reform has added cost and complexity to residential ownership. Commercial leases are negotiated between businesses and sit under a different framework.

Which asset classes they are choosing

First time commercial buyers are not chasing large office towers. They are buying assets they can understand and that serve everyday demand.

• Small industrial and warehouse units in established southside and northside precincts.
• Medical and allied health suites leased to practitioners who rarely relocate.
• Childcare centres on long leases to established operators.
• Convenience retail and service stations on main roads.

Each of these depends on population and need rather than sentiment. That is what gives the income its durability.

Where first time buyers get it wrong

The appeal of a higher yield can blind a buyer to what sits behind it. A yield is only as good as the lease supporting it.

Before we recommend any commercial acquisition, we want answers to a short list of questions.

• How long is left on the lease, and what options does the tenant hold?
• How strong is the tenant, and how hard would they be to replace?
• Which outgoings are recovered, and which fall back on the owner?
• What does the zoning allow if the current use ends?
• What would it cost to build the asset again today?

A property that answers those well is usually worth paying for. One that does not is rarely saved by a sharp asking price.

The trend has further to run

We expect this shift to continue into next year. Not because residential has stopped working, but because more investors now see commercial property as a normal part of a portfolio rather than a specialist corner of the market.

The better assets are already being tightly held. Many of the strongest opportunities we see never reach a portal and change hands quietly through agent relationships.

Our view

Moving into commercial property is a sound decision for the right buyer with the right asset. It is a poor one when the purchase is made on headline yield alone.

At Hastings Beaumont we act only for the buyer. If your next acquisition could be commercial, we will assess the lease, the tenant and the price with you before you commit.