Commercial property investing has become increasingly popular in recent years, with investors seeking higher yields and stable returns. But is commercial property a good investment in Perth? Let’s take a closer look.
The Benefits of Commercial Property Investing in Perth
High Yields and Cash Flow
Commercial properties offer higher yields and cash flow compared to residential properties. The recent tightening of the commercial market has resulted in yield compression, effectively leading to capital growth.
Long-Term Leases
One of the biggest advantages of investing in commercial property is the ability to negotiate long leases. Some commercial properties offer three, five, or even ten-year leases, which allows for annual rental increases to be built into the contract.
Tenant Security and Predictable Returns
Commercial tenants provide security and strong returns, as they are responsible for all outgoings. Well-known commercial tenants such as Coles, Australia Post, BWS, IGA, or Suncorp, have a reputation to uphold, leading to more predictable returns. Residential tenants, on the other hand, can be far more unpredictable and lead to unforeseen costs.
Passive Income
Long-term commercial property investments can lead to greater returns, and some commercial property loans can be fully paid off in as little as ten years. After which time, that passive income will go straight into your pocket.
Types of Commercial Properties in Perth
Commercial properties generally fall into one of four distinct asset classes: office space, retail, industrial, and specialty. Each asset type has its own set of risks and rewards and is subject to economic trends.
Office Space
Commercial office spaces can range from a CBD office tower to a small suburban office. Key market factors for investing in commercial office space include employment growth, business confidence, and workplace flexibility. Quality office buildings should be located close to food and retail amenities, near transport networks or ample parking, set in pleasant surroundings with plenty of natural light, and well-maintained.
Retail
Retail tenancies can range from entire shopping centres to a small hairdresser’s shop front. Property market drivers for investing in retail properties include consumer confidence, interest rates, surrounding tenancy mix, and income growth. Quality retail properties should be highly visible from a main road or in full view if inside a mall, close to quality anchor tenants, positioned in high population growth locations, and occupied by well-established tenants with strong covenants in place.
Industrial
Industrial commercial properties can range in size and potential uses, from a small industrial site to a major logistics and distribution centre. Key considerations for investing in industrial properties include the quality of road networks, the economy, and access to important infrastructure. Quality industrial properties should be well-maintained and secure, include an external loading dock with heavy vehicle access and suitable height limits, have minimal or no restrictions on water usage, discharge, or noise, offer flexibility for future additional offices or showrooms, and boast high ceilings.
Specialty
Specialty commercial properties can range from a service station to a childcare centre, hotel, or pub. Key factors to look out for when investing in specialty commercial properties include business confidence in that particular sector, interest rates, and the general state of the economy
Is commercial property a good investment in Perth?
When it comes to investing in commercial property in Perth, there are several factors to consider. Here, we will explore the benefits and drawbacks of investing in commercial property in Perth, so you can make an informed decision.
Benefits of investing in commercial property in Perth
High cash flow
Commercial properties offer high cash flow and provide exceptionally high yields compared to residential properties. This is because commercial properties typically have longer lease terms, which provide a more stable income stream.
Long-term leases
Investing in commercial property in Perth offers the option to negotiate long leases, with some commercial properties boasting three, five, and even more than ten-year leases. With this, you have the opportunity to build annual rental increases into the contract.
Guaranteed security
Commercial tenants guarantee security and with it, strong returns. As well as being responsible for all outgoings, a well-known commercial tenant will have a reputation to uphold—whether that’s Coles, Australia Post, BWS, IGA, or Suncorp. This means that the tenant is less likely to default on rent payments, which provides a more stable income stream.
Potential for capital growth
Investing in commercial property in Perth could see greater returns over the long term. Some commercial property loans can be fully paid off in as little as ten years: after which time, that passive income will go straight into your pocket.
Drawbacks of investing in commercial property in Perth
High initial cost
One of the biggest drawbacks of investing in commercial property in Perth is the high initial cost. Commercial properties are generally more expensive than residential properties, which means that you will need a larger initial investment to get started.
Longer vacancy periods
Commercial properties can have longer vacancy periods, particularly during periods of economic downturn. This means that you may need to have more funds available to cover any periods of vacancy.
Greater risk
Investing in commercial property in Perth comes with greater risk compared to residential property. This is because commercial property values can be more volatile and are more susceptible to economic and market trends.
Maintenance costs
Commercial properties generally require more maintenance than residential properties. This is because the tenant is responsible for maintaining the property, which means that you will need to budget for ongoing maintenance costs.
Top 5 Perth Suburbs To Consider for Commercial Property Investments
West Perth:
Located just a few minutes from Perth’s CBD, West Perth is one of the most popular areas for commercial property investments. It is home to several high-rise office buildings, as well as a range of retail and hospitality businesses. West Perth’s location makes it an attractive option for businesses looking to be close to the city without paying CBD rents.
Subiaco:
Subiaco is another popular area for commercial property investments, located just a few kilometers west of Perth’s CBD. It is home to a range of businesses, from small startups to large corporations. Subiaco’s proximity to the city, as well as its vibrant retail and dining scene, make it an attractive option for businesses and investors alike.
East Perth:
East Perth is a rapidly growing area located just east of the CBD. It is home to several large-scale commercial developments, including the Optus Stadium and Crown Casino. East Perth’s location, along with its proximity to the Swan River, make it an attractive area for businesses and investors looking for a prime location.
Fremantle:
Located just south of Perth, Fremantle is a bustling port city with a rich history and a thriving commercial scene. It is home to a range of businesses, from small boutiques to large warehouses. Fremantle’s location, as well as its vibrant culture and tourist appeal, make it an attractive option for investors looking for a unique investment opportunity.
Joondalup:
Located north of Perth’s CBD, Joondalup is a growing area that is home to several large-scale commercial developments. It is particularly popular with businesses in the technology and education sectors, thanks to its close proximity to several universities and research facilities. Joondalup’s location, as well as its growing economy, make it an attractive option for investors looking to capitalize on the area’s growth potential.
Investing in commercial property in any of these suburbs can be a great way to build wealth and secure a stable source of passive income. However, it is important to do your research and work with a trusted finance advisor to ensure you are making a smart investment decision
Conclusion
Investing in commercial property in Perth can provide a stable and high-income stream over the long term. However, it is important to consider the risks and drawbacks before making any investment decisions. With careful research and due diligence, you can make an informed decision and potentially reap the rewards of investing in commercial property in Perth.
