Commercial Property Characteristics and Value
Commercial property is used for business activities, or to generate a profit through the collection of rental income or capital gain.
It can be in many forms. This includes office buildings, hotels & motels, medical facilities, retail shops and shopping centres, farm land, warehouses and storage facilities…
What’s the difference with Residential Property?
1) The Positives
Longer Lease Profile
The average lease for a commercial property is much greater than residential, measured in years rather than months. As a result, commercial tenants tend to offer greater stability and certainty of income.
Tenant support for Outgoings
Commercial tenants typically cover outgoings such as council and water rates, insurance, body corporate fees etc. Some laws will prohibit passing on “expenses that do not benefit the premises” but they can be passed on more readily than residential.
Value stability relative to other Asset classes
Relatively speaking, there has been less price fluctuations in commercial property values.
Tenant supported Asset improvements
Tenants are more likely to make improvements to the structure and layout of a commercial property, which can be beneficial to its value in the longer term.
2) The Risks
Commercial property is not without risk. So always consider:
Vacancy Periods
Commercial properties run the risk of being untenanted for extended periods of time, the lead times can be extensive in finding a suitable tenant. This means covering expenses during this period.
Exposure to the Macro Economy
A very obvious point right now, especially during the COVID crises. The resultant economic downturn, weak business conditions or high unemployment may mean that there is less demand for commercial property.
Maintenance Costs
Yes, whilst your tenant may make some improvements to the property, the cost of upgrades when things breakdown, especially for a larger retail or office site, can be really expensive compared to other asset classes.
What tool can I use to measure my commercial property value?
Understanding the “Cap Rate”
The capitalisation rate, more commonly called the “cap rate”, is defined as the ratio of net operating income to the property’s value. Whilst it does not represent a detailed analysis of the property investment risks, the cap rate is a useful industry ratio and it can be helpful in comparing different investment options.
Looking at cap rate trends can give you insights into the direction of valuations.
Book Your
Free Loan Review
Receive a customised review to improve your savings and reduce the amount you are paying.
Related Blog Articles
The consequences of parental financial support
This article delves into the rising trend of parental financial support for homebuyers, examining the consequences for both parents and children, including potential strains on finances and long-term impacts on housing markets. – The consequences of parental financial support.
SME’s go it alone instead of calling on expert advisers such as Accountants and Brokers
Too few businesses seek strategic or risk management advice according to a leading survey of Australian SME's. The SME Growth Index is produced by market analysts East & Partners as Australia’s longest-running in-depth research on small business growth prospects....
Put your assets to work to grow your business
Investing in assets to build your business can create a cash flow bottleneck.
You need finance to meet demand and thrive — however you don’t want to put your entire business or your personal assets at risk.
Avoiding mortgage default
With higher interest rates and costs of living, Australian homeowners are feeling the pressure. This article explores mortgage stress and what you can do to avoid mortgage default. – Avoiding mortgage default.
Property investment and how to avoid failure
This article outlines the risks associated with investing in property and ways to mitigate these risk. – Property investment and how to avoid failure.
Authorised Credit Representative 383415 of IFBA Pty Ltd. Australian Credit Licence Number 383415.
Disclaimer | Privacy Policy