Research undertaken by the National Seniors Australia showed that regular constant income covering essential needs is their number one priority. With an aging population and around 160,000 new retirees each year, now is a great time to look at the investment options.
The retirement income challenge
Residential property investments take the lion’s share of media coverage, however investment in commercial property has delivered a very stable return in recent history.
Since the mid 1980’s, commercial property in Australia has delivered returns of 9% per annum, this is comprised of 2% capital growth and 7% income. This is twice as much as standard term deposit rates over the same period.
So here are the 10 things you should know about commercial property:
1. What is commercial property?
Commercial property portfolios are made up of 3 main types;
* Office – from basic office blocks to large business parks,
* Industrial – warehouses, specialised factories etc and
* Retail units – comprising of shopping malls, fast food outlets, restaurants and service stations.
2. What’s the difference between commercial property and residential property investment?
Renting to high quality tenants with a good record of commercial enterprise is very different from renting out to families or individuals. Commercial properties usually have pre-set rental increases and lease agreements are often for a longer period than residential property making for very stable returns.
Maintenance costs are regularly included in the lease and are the responsibility of the tenant, and rental income can often be higher than in the residential sector.
3. Low barriers to entry
Fortunately, you don’t need to purchase a factory or shopping centre to invest in commercial real estate. Australian Real Estate Investment Trusts (A-REITs) are both accessible and affordable.
In effect the investor buys into a wider range of commercial property portfolios giving them a chance to access the benefits of larger scale property investment.
4. The advantages
Longer term leasing has already been alluded to as a business does not want to regularly change tenancies. The average residential rental is around 12 months with no guarantee of the tenants renewing, a commercial lease is between 3-10 years.
Commercial tenants invest in the buildings with refurbishments and other capital investments which can add to the property value. Maintenance costs are usually covered by tenants and they also pay for any business rates, water charges etc. Compared to the needs of a residential tenant, commercial tenants relatively hassle-free.
Capital values also historically show a low level of fluctuation when compared with other investment types.
5. Potential disadvantages
Business sectors can be hit by economic downturns which can leave a property untenanted. Changes to legislation may mean more investment in the building or upgrades which will be more expensive than those of a residential property.
Landlords may not do their research in terms of inspecting a property and charging a reasonable rent for both the area and the current market conditions which can mean the property is not viable.
6. Diversification
A-REITs offer diversification through different type of commercial property investments. These investments include a range of commercial premises, sectors and localities so you are not putting all your eggs in the one basket, which for many retirees offers peace of mind as well as potentially more stable returns.
7. Tax advantages
There are a few commercial property funds that distribute “tax deferred” income as part of the distribution. A property trust can offset income that is taxable against a number of deductions such as cost of refurbishment or depreciation on equipment and plant.
Tax is not therefore immediately payable on “tax deferred” income and this tax deferred amount reduces the cost base of the initial investment.
8. Flexibility to buy and sell
If you had to buy a whole office block or retail premises that you wish to sell, it takes a considerable amount of time, money and effort.
By investing in a range of properties through A-REITs, the investor holds in effect shares which can be bought and sold at any time, a very easy process and a quick way of releasing some cash if needed.
9. Managed by experts
Owning commercial property investments has a myriad of contractual agreements, tenancy negotiations, contract and compliance issues that need to be followed through and managed.
For those who have left the business world behind and want to enjoy the benefits of retirement without the demands of the corporate life but with a steady flow of income, A-REITs provide this benefit. Owning a slice of a number of commercial businesses does not come with the burden of corporate responsibilities.
10. Steady and growing income
Flexible and individual investments with a fixed and steady income brings peace of mind. If the business sectors fluctuate, rent still needs to be paid. Over a period of time rents will go up (linked usually to the Consumer Price Index) making it one of the safer and more stable forms of investing.
Comprehensive analytics and research
We invest a great deal of time and effort researching the best investment strategies for our clients. We have developed a number of systems to manage and track the marketplace.
The investment landscape always evolves and it is more important than ever to consider your investments and superannuation funds carefully. We pride ourselves on being experts in researching opportunities, investments and strategies that fit in with your retirement goals. We want, our clients to get on with enjoying their life rather than worrying about money.
For an obligation free conversation about your financial future, please contact us on 03 9603 0072 or at advice@endorphinwealth.com.au
Phillip Richards and Robert Rich
Endorphin Wealth Management
Phillip Richards is a qualified Financial Advisor with over ten years’ experience. Contact Phillip today to discuss how you can build your own wealth and plan to reach your retirement goals.
Robert Rich is a qualified Financial Advisor with over nine years of personal investment experience. Contact Robert today to discuss how you can build your own wealth and plan to reach your retirement goals.
This information is general in nature and does not take your personal situation into account.
Contact Us for quality financial advice so you can feel good about your future.
