Residential house prices in Australia are soaring, with combined capitals experiencing an 8.3% annual increase and combined regional home values rising by 7.0% over the year according to the latest Core Logic data. This surge has made entering the residential investment market increasingly challenging. Consequently, commercial real estate has re-emerged as an attractive alternative investment opportunity. 

Commercial properties also typically offer higher returns than residential properties, with net yields ranging from 5% to as high as 12%, compared to the 3.7% average residential rental yield across Australia, with slightly higher yields of 4.4% in combined regional areas and 3.5% in combined capitals as reported by Core Logic.  

In commercial property, leases are signed for longer durations, with locked in price increases that are calculated per square metre, providing stability and predictable income. However, it's important to consider the potential for longer vacancy periods between tenants.

Commercial property tenants usually maintain the premises diligently to ensure smooth business operations and often address maintenance tasks promptly on their own.

Depending on the lease terms, tenants might also be responsible for covering additional expenses such as council rates, property tax, personal liability, and property insurance. This is in contrast to residential properties, where landlords typically cover costs like council rates, water, and body corporate fees.

The commercial property market in Australia offers various investment opportunities with varying yields and price points. Investors should align their choices with their growth strategy and understand market dynamics and sector-specific trends to identify the most profitable commercial property investments.

We have explored some of the most popular commercial property types as investment opportunities in Australia.

1.Office buildings

Office buildings have traditionally been a staple in commercial property investment but has come under scrutiny lately due to high vacancy rates.

The demand for A-grade offices, in high-demand locations, close to transport and facilities has continued to do well, but subprime office spaces have lost traction and investors in this sector have had to consider upgrading or adaptive reuse to ensure tenancy. 

Popular adaptive reuse solutions include converting office spaces to residential units or data centres. Recently, there has been a significant rise in demand for speculative, or pre-fit, office spaces. Property owners fit out these offices before securing tenants, catering to those who wish to avoid the costs of custom fit-outs and desire immediate occupancy.

Additionally, these pre-fit spaces appeal to tenants with a focus on sustainability, as many such offices involve the reuse of existing structures.

2. Industrial warehouses

The ‘2024 Australia Post eCommerce Industry Report’, an in-depth study into consumer buying behaviour and trends, highlights that the average online retail spend in 2023 comprised 16.8% of Australia’s total retail spend, with online sales reaching $63.6 billion. Post-Covid e-commerce activity has stabilised but continues to grow, fuelling demand for industrial warehouses. 

According to the ‘Australian Logistics & Industrial Investment Review and Outlook 2024’ report, published by JLL, the gross take-up of industrial space reached 2.5 million sqm nationally in 2023, slightly above the 15-year annual average of 2.4 million sqm, though below the peaks of 2022 (3.4 million sqm) and 2021 (4.3 million sqm).

Remarkably, 70% of projects completed in 2023 were absorbed at practical completion, and 69% of the 450,000 sqm slated for completion in 2024 has already been pre-leased.

The report also projects Australia’s GDP to grow by an average of 4.7% annually over the next five years, necessitating approximately 7.4 million sqm of new industrial space to meet rising demand driven by population growth.

Investing in commercial property, while more lucrative, is more challenging than residential property due to the larger initial capital requirements, typically averaging a 30% deposit plus additional costs. Despite these challenges, warehouse assets continue to see strong rental growth and low vacancy rates. 

Warehouses that offer flexibility for various uses such as storage, distribution, and light manufacturing, are especially attractive. Securing leases with reputable tenants like logistics companies and retailers ensures steady income.

Additionally, warehouses located near major transport hubs and urban centres, including ports, airports, and highways, offer logistical advantages and robust rental yields.

3.Retail centres

Despite the substantial growth of e-commerce in the past financial year, an omnichannel approach, integrating shopping experiences across physical stores, online marketplaces, social media and mobile apps, has proven essential for brand loyalty and growth.

Retailers find that having a physical presence in shopping centres boosts e-commerce engagement, as consumers often research products online before visiting stores well-informed and ready to purchase.

As consumers continue to value in-person shopping experiences, shopping centres remain attractive to major investors seeking high returns from assets devalued during the pandemic. Retailers are focusing on creating seamless in-store shopping experiences that complement their online offerings to draw customers back to physical stores.

While the retail sector has traditionally been dominated by institutional investors, private investors are increasingly getting involved, with smaller retail investments like strip malls emerging as an appealing investment alternative.

Experts note that retail centres in high foot traffic areas with diverse offerings tend to perform well. The ideal setup includes a strong anchor tenant, like a grocery store, alongside a service tenant, such as a medical clinic or dental office. 

Long-term leases with established tenants provide stability and attractive returns. Additionally, mixed-use developments that blend retail with other uses, such as residential or office spaces, are becoming more popular, offering investors multiple revenue streams and enhancing the appeal of retail properties.

To capitalise on untapped opportunities and achieve sustainable financial success in commercial real estate, investors should conduct thorough due diligence, including financial analysis, market research, and property inspections.

Instead of focusing on a single commercial property type, prioritise flexibility and market responsiveness. Assess the potential for rental income, capital appreciation and explore diversification across different property types and locations, while remaining informed about market conditions and regulatory changes.

As the real estate market evolves, staying attuned to market trends and having a robust property investment team, including a property depreciation specialist like BMT Tax Depreciation, is crucial. As the number one choice in property depreciation for almost 30 years, BMT Tax Depreciation specialises in maximising the tax return on commercial and residential property investment properties. 

For more information on property tax depreciation or to request a quote contact us on 1300 728 726 or request a quote.

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