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Where does commercial property sit on the scale of risk and return?

Categories: Commercial, Investments

Not all investments are created equal.

Some offer potentially high returns, but they come with higher risks. Others offer lower yields but the income is regular, steady and dependable. Others offer very little return during the life of the asset but a significant capital upside when sold at the end of the asset’s life. Ultimately, it’s all about mitigating your risk while maximising your return.

So where does commercial property sit on the scale of risk and return? And how does a commercial property investment in Australia compare to other investment options?

Commercial property returns

Commercial property investment is a sophisticated game but it provides an opportunity for robust returns with limited risk. We know this because it’s what we do and it’s what we love — we build and manage syndicates to invest in commercial properties around Australia. What’s more, on average, we’ve historically achieved returns for our investors of around 20 per cent or more per annum (which is a mixture of cash return and capital growth).

The great part about these investments is the security behind the rental income. With Australian Stock Exchange-listed and nationally recognised tenants paying your rent, it compares favourably to residential property.

The other important advantage of commercial property is the length of the leases involved — they’re typically five to seven years and can be secured up to 15 years or even longer. If you pick your tenant right (like a Bunnings-sized business, for instance) it can bring peace of mind for a decade. Compare this to residential property where the typical landlord would be excited to receive a one-year lease and would be over the moon to secure a two-year lease.

Obviously the length of the lease is a key factor in the continuity of income; however, the reputation of the tenant is equally important. This is why commercial property is such an attractive opportunity. When you choose the right tenant and secure the lease right, it can be attractively passive.

Residential property

While the sometimes strong capital appreciation must not be overlooked in residential property, the yields are typically much lower. For instance, over the 10 years to 2015, Australian residential property investments yielded average returns of 5.1 per cent, according to the Real Estate Institute of Australia. Compare this to the 10 per cent in commercial property and you can begin to see why we prefer commercial.

Shares, bonds and the cash rate

According to the Australian Stock Exchange’s Long Term Investing Report 2016, the 10-year average annual gross returns (to December 2015) for Australian shares were 5.5 per cent. That wasn’t quite as strong as bonds, at 6.2 per cent, but far better than cash at an average of 3.1 per cent over the same period.

The stock market took a big hit during the Global Financial Crisis, with many blue-chip stocks dropping up to 30 per cent in value. A decade later, blue-chip stocks may once again be returning yields in the vicinity of seven per cent, but many investors are now far more cautious about shares because of the stock market’s volatility. The GFC ultimately pushed many investors towards term deposits as an avenue for yield.

Commercial property is a sound investment choice

Every investment is different and past performance is never a guarantee of future success. The stock market can be volatile. Residential property can be boom and bust. Interest rates fluctuate. And there are exceptions to these rules throughout all industries.

But if you want an investment with a long-term, high-yielding return that is extremely well mitigated against risk, then commercial property is an excellent choice. We believe the average returns we offer are attractive by any measure and especially so when considering the passive stability of the investment and the underlying tenant covenants.

If you’d like to learn more about commercial property investment in Australia, contact Properties & Pathways. We’re happy to discuss opportunities with you to illustrate what we believe could be the best possible outcome for your investment.