A guide to choosing the right commercial real estate investment - Industrial, Retail or Office?
Commercial property, compared to many other investment classes such as term deposits, bonds and residential property, has proven a strong and reliable asset for many investors.
But determining what sector and property best suits your financial position, investment objectives, and positions you for future wealth creation is vitally important.
Here’s a summary of the different sectors and their separate benefits.
When it comes to the office sector, some of the main factors you will want to consider include:
- grade quality - premium grades are commonly the focus of institutional or consortia investors, while more affordable lower grade property is the focus of syndicates and individual investors. The asset grade will also determine whether future renovation or fit-out expenses are required to attract a long-term quality tenant;
- proximity to public transport - this will make travel to work more affordable for workers, assisting tenants in staff retention;
- nearby amenities - shops and cafes add convenience and the opportunity of off-site meetings for staff and clients.
If you’re looking to enter the market or are on a tight budget, then small strata office suites may be an appropriate option. Substantial, freehold office towers which sit at the upper end of the market, are typically the focus of larger, group investors.
Office spaces can be found in most regional, metropolitan and CBD areas, acting as economic and employment hubs for the markets they service. Choose a property in a location recognised for historically high demands and healthy returns.
Strata or freehold?
In most cases your budget will determine whether you can afford to buy a freehold property or within a strata-titled complex. Factor in any strata levies, which you’ll either pass on to the tenant, or absorb yourself.
Just like everything in life, the higher the quality of a product is, the more expensive it will be. The same occurs with office holdings which follow gradings that are determined by their size and quality. The gradings are Premium, A Grade, B Grade, C Grade, D Grade.
Office spaces larger than 1,000sqm which are marketed for lease or sale need to have a Building Energy Efficiency Certificate which sets out the energy efficiency rating of a building or area of a building.
Like with office suites, when searching for industrial property you’ll also want to explore factors such as location and budget but you’ll need to look at these aspects from another angle.
Your budget is going to determine the size of the property you can afford. Smaller budgets will be well suited to small strata titled industrial units while larger budgets are more likely to afford large freehold assets on the doorstep of arterial roads or transport infrastructure such as airports or shipping ports.
Types and sizes
The spectrum of industrial property is wide, reflecting the sectors’ wide role in servicing the economy. These include warehouses, factories, strata industrial estate and business parks. The warehouse sector has been a booming component of industrial due to the rise of e-retailing, but it is commonly the most expensive of the assets due to size and internal stacking requirements. But there are many more opportunities for various budgets. Once you have determined what type and size of industrial property you can afford, so once this is established, you can then investigate locations in which to buy.
Industrial real estate needs to be in proximity to major infrastructure because of the nature of these properties. Proximity facilitates efficiency for tenants and reduces operational costs. This means you’ll want to look for industrial properties close to major arterial roads, intermodal terminals and freight rail. Commonly, councils have zoned industrial precincts in outer regions of cities and towns.
Just like the office sector, the industrial sector also has gradings that determine the quality of the property. In this case there are just two gradings: Prime Grade and Secondary Grade.
There are a number of different types of properties within the retail sector and they tend to be determined by the population density and demographic makeup of the area in which they are located. Just like with the office and industrial sectors, the retail property that is right for you will come down to your budget, size and location preferences.
Retail types include:
- Strip retail - individual shopfronts in town or suburban shopping precincts;
- Bulky goods - also known as ‘Homemaker centres’, these sites span less than 5,000sqm and include a number of specialty shops. Bulky goods businesses can include whitegoods, electronic, hardware and garden retailers;
- Neighbourhood centres - these span less than 10,000sqm and include one or two major supermarkets, supported by small scale specialty businesses such as butchers and GP clinics;
- Sub-regional centres - these span around 20,000sqm and are anchored by a major discount department store and one to two supermarkets;
- Regional centres - spanning between 30,000sqm and 50,000sqm, these centres typically have one department store, a discount department store, one or more supermarkets and around 100 specialty stores;
- Super regional - These centres span more than 85,000sqm and include two department stores, at least one discount department store, two supermarkets and about 250 specialty shops;
- Speciality retail - These include businesses - commonly freehold - such as petrol stations, child care centres and takeaway food centres with drive-thru facilities.