Is commercial property a better investment class than residential?

Outside of needing a higher deposit, would there be any reason NOT to invest in commercial properties (vs residential)?

Comparing to residential investment properties, assuming same level of property selection skills, commercial properties has:

- Higher rental yield
- Tenant pays all outgoings
- Longer leases
- More uplift potentials (e.g. create new tenancies, add more NLA such as mezzanine)
- Availability of multi-tenancy
- Capital growth is less speculative (as even if cap rate remains the same, the value increases as rent increases every year)

Some myths about commercial properties vs residential:
- Less capital growth -> we have seen phenomenal yield compression in commercial over the past 10 years. There is usually rental increases written into the lease and property value would increase independent of market movement as a result.
- Higher risk -> Like residential, if quality property is selected (good location, good tenant, multi-tenancy), the risk of vacancy is low

Given the above, I can't think of a reason why not to build a portfolio of high quality commercial properties instead of high quality residential properties. The cashflow is much better and capital growth is just as good. Do you agree?

 

For sophisticated investors with plenty of capital it could very well be.

Generally speaking resi is lower risk for the majority. More liquid assets, easier to find tenants, generally lower barrier to entry, easier to finance. That fits the profile of the average person a lot more.

Perhaps starting with resi and as income/capital grows, transitioning to a commercial portfolio is the way to go. It's certainly something which has worked for many.

 

Definitely not.

 

No!

 

Holds true for many unsophisticated ones as well.

There are few large scale investors in residential RE (either publicly listed or privately held) as opposed to residential developers cum investors (Stockland, Mirvac, Meriton, Central Equity etc) which then pales into insignificance against commercial interests (REITS, Syndicates, insurance companies, Super funds etc).

When comparing residential to CIP are you considering numbers of properties and perceived ease of entry, numbers of investors/owner occupiers, then residential may win.

 

More likely to get into disputes with commercial - more costly legal fees
lots conducting business go under, more than individuals
more changes of being sued for slip and fall cases
harder to get finance (can also be easier!)
harder to 'access equity'
longer to find tenants potentially

 

Wouldn't a lot of these be due to poor asset selection? For example, if you rent to a long term tenant with a clean history and they are a non-discretionary business, the chance of them going under or not paying rent would be fairly slim. On the flip side, for residential, you may get poor tenants who trash the place but you may not be able to kick them out or forced to negotiate because of compassionate reasons.

I agree CP usually has longer vacancies if becoming vacant, but if it's a good location, from my understanding, the vacancy is usually 3~6 months. I read somewhere that taking vacancy into account and fact the leases are usually much longer once tenanted, the overall yield over a 10-year period is still much higher in CP than in residential.

As for financing, I have acknowledged that initial deposit is usually higher in CP than in resi, but that's not my question though. I opined CP is a superior asset once acquired comparing to resi. Also, with CP loan, lease-doc loan would allow people with no borrowing capacity to keep going?

-Harder to access equity - Can you elaborate? why is it harder? Valuation and extract equity be the same as resi?

 

Can you elaborate? Looking forward to learn your opinions

 

Can you elaborate? Looking forward to learn your opinions

 

With over 20 years experience with multiple resi properties, some of which many would consider dodgy at best, I can say that I've had my fair share of problematic tenants, but they're not all from lower socio areas. So long as you have the right kind of LL insurance, you are covered for tenant damages and loss of rent. Good PM is key.

 

I understand. My post is not about resi investment isn't good (I have more resi than commercial right now myself), I was opining that from the points raised in my OP (cash flow, uplift potential, predictability), CP is superior in those three aspects while being as good as resi in other aspects (security, capital growth) if asset selection and due diligence are done right.

 

You were the one making the comparison between commercial and resi. I answered with my experience with resi, with it not being as risky as some would suspect.

I've also witnessed some (large) commercial properties in good location sit idle for more than 10 years.

 

Yes definitely.

I have seen places vacant for years.
Bunnings in Macarther NSW has just moved locations. It will be interesting to see how long their former place remains vacant.

2 reasons
a) lenders are more fussy over what the funds will be used for, and
b) Usually there will be a company owning the commercial property, either as trustee or in its own right. There are legal issues with one entity borrowing with another entity using and the lenders know this as well and a reluctant to lend.

We are doing a one loan now where the owner is an individual and he wants some extra borrowings and the security is a commercial property. It is certainly more difficult that residential but possible in this situation at least.

 

Is there a survivorship bias problem with commercial property investor experiences?
Even for resi people get can get killed financially.

 

Charter Hall is repositioning, repurposing and refurbishing the ex-Bunnings at Gardiners Rd Mascot - has sat vacant for 3+ years.

 

And Brickworks has spun out its property holdings into a Trust in a joint venture with Goodman held 50.1%/49.9%

 

it is fantastic and definitely better than Resi... but you need to know what you are doing
most HNWIs are heavily into CRE, not Resi

most of the guys who have survived tho have LVRs of 20-50% and massive cash reserves. this is a totally different game to resi. its basically running a highly complex business [your portfolio being a REIT which generates a nett income after paying costs, mortgage being one of them].

unlike resi - you get killed with asset value falls and vacancies, not because you cant cover your mortage repayments. sometimes banks just want to exist a certain sector say pubs or childcare and you must always be in a position to refi elsewhere [hence the need for cash on hand, a handful of unencumbered assets, good yields and WALE, and a low LVR]

its also about scale. you can have a portfolio of $50-100m worth of CRE and manage it easily and generate a lot of income to cover lifestyle/legal and accounting costs/asset management/capex/principal repayments/rainy days... cant really do that with $50-100m of resi.

its good to have SOME resi in your portfolio always tho and really balances out a commercial portfolio while adding an element of growth/security.

 

I don't think resi is risky at all, just want to see people's opinion on why one would choose resi over commercial outside of the barrier to entry?

 

Thanks, some great insights there that I have not considered before.
With value falls and vacancies, it would be more risky to re-tenant if the building is single-purpose built (pub, childcare, hotels...etc). However, if it is a versatile space such as retail space or showroom in a good location, do you still find there will be prolonged vacancies?

 

Well, I don't consider it risky either, but many newbies do.....and you said

As you are fairly new to the site, I'm unsure of what your risk factor is.