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Commercial realities

Commercial realities

The indicators for commercial property aren't as easy to read or obtain as they are in the residential market. But they're arguably even more important. Shane McNally

You're looking at buying a small commercial property but the standard indicators aren't available to help you choose the right investment. There are no median sales charts to show the last 50 properties to sell in the suburb because the offices or shops you're considering have little or nothing in common and there probably wouldn't be 50 sales in 10 years, let alone one. In short, assessing a sound commercial investment has a different set of guidelines and strategies to buying residential. But there are some pointers that make the search easier.

Macquarie Bank head of property research Rod Cornish says investors need to pay attention to vacancy patterns and local business growth when considering office space and interest rates and spending patterns for the retail sector.

"Definitely prospective investors should be looking at where the vacancies are falling and demand is increasing before buying into the office market," he says. "Lower vacancy rates typically lead to rental growth. What we're seeing now is low vacancies are driving up rents and that's flowing further into value increases because investors can see the rents rising."Cornish urges investors to consider the age and efficiency of commercial properties. He says investors need to treat older office buildings more cautiously than they would a residential property of the same vintage, where age may be a character asset.

"They also need to consider sustainable or green issues, which are a major factor in today's office market," he adds. "An older, rundown residential property in a prime location could be refurbished but a similar standard building in the commercial market would be relying very much on the site value."

Cornish says CBD locations are in strong demand in all capital cities, so smaller investors should look to buy as close to the prime areas as possible to gain the greatest benefits.

"The Brisbane and Perth CBD markets have done exceptionally well, with office vacancy rates the lowest they've ever been and Melbourne's the strongest in 35 years," he adds. "The CBD rises first and then tenants tend to look at near-city locations." Retail investment requires a different set of principles, Cornish says, but says the market's stability makes it an option worth considering. "For retail properties, investors should look for a spending pattern and sales growth," he says. "While non-discretionary or essential spending in outlets like supermarkets aren't impacted by the same cycles, typically discretionary spending is linked to the housing cycle. When you have housing construction, you tend to have people buying fridges and plasma TVs so discretionary spending went through a really strong cycle through until 2004. It started to slow down through 2005 and 2006 but now it's just started to pick up a little. But right now, the office cycle is stronger than the retail cycle.

"Retail is still a very steady investment. It has very low volatility and typically solid returns even in downturn. The one indicator in retail property is to look at sales because that flows through to rents and when you have rental growth in the retail market, you get value growth flowing on. Look at interest rates when you look at retail property. When you get a fall in interest rates, typically retail property does well and when there's a rise in interest rates, it doesn't do as well."

Adelaide property analyst Peter Koulizos stresses to investors that they understand the lease situation on any potential commercial property. He says a reliable current tenant is essential to a successful commercial property and investors should make themselves familiar with the term and length of the lease before considering a purchase.

"The key to commercial property is the lease," he says. "You value residential property based on what other similar residential property sells for. But if you're looking for sales of restaurants on the first floor in Adelaide, for instance, there wouldn't be too many."

Koulizos says incoming rent and not just the promise of a good rent in the future can't be underestimated: "Commercial property is based on the rent coming in, multiply that by the sort of return you're looking at and commercial property, depending on whether it's retail, industrial or office, you're probably looking at 6.5 to 8 per cent return."

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