When it comes to property investment, most people gravitate towards the familiar category of residential property. However, for a knowledgeable investor commercial property can offer some big advantages as well, either as a space for their own business or as an investment income source.

So what are the pros and cons of going commercial?

From warehouses and offices, retail shops to car parks, there are a wide range of property types to consider when you look at your investment options. If you already have other investments including residential property, adding commercial property is a way to diversify your portfolio. Plus, if you own a business and are currently leasing premises, owning your own place can often be a way of building wealth outside of the operations of your business.

The main potential advantages

1. Higher yields – generally commercial properties in the right markets will yield significantly higher returns (3-4 % pa) than residential properties of the same value.

2. Longer tenancies – while a residential lease may typically be for 6 or 12 months, commercial leases are usually for a minimum of 3 years and with options can last up to 15 years. Commercial tenants will often build up business goodwill at their trading location, while other businesses will want to avoid the relatively large cost and disruption associated with a move.

3. Higher tax deductions – commercial properties generally enjoy higher depreciation benefits since there are more assets to depreciate. On the downside, since these items wear out more quickly in commercial premises there will be capital costs to bear in replacing them.

4. Opportunity to replace your landlord – for some businesses, particularly those operating manufacturing or warehousing facilities where there is a high level of confidence that the business will occupy the same location for 15 years or more there will be benefits in owning the property. You can make changes to the property without obtaining landlord permission, and over time build an asset that is independent of the business itself.

   Some business owners take the opportunity to purchase their business premises using their self-managed superannuation fund (SMSF). Purchasing through an SMSF is primarily a tax strategy and note that investments made by the Super Fund must conform with the fund’s overall diversified investment strategy.

Disadvantages

1. Longer vacancy periods – with higher yields come higher risks in terms of continuity. While lease terms may be long, so can vacancy periods. This highlights the need for a higher level of research of demographic, economic and market trends. How are the vacancy rates in the area in good economic times, and bad? How solid is the business of the tenant? How quickly can they be replaced if their business fails, or the local plant supporting them closes

2. Value Volatility – commercial property prices are typically much more variable (up and down) compared with residential properties. They are affected by the economic cycle, demographic changes and the tenure of a lease. Valuers will consider the terms of the current lease when preparing their market valuation for a lender.

3. Sensitivity to Business Climate – when business is booming the demand for commercial properties usually booms too. But the converse is true during market recessions.

Commercial property can be a smart investment, delivering plenty of benefits, but it’s very important to do your research and get the right advice to achieve its full potential.