Over the years, Scott O’Neill, director of Rethink Investing, has increasingly gravitated towards commercial property investing, and he has good reason for doing so. From securing the right tenants and scouting an ideal location, to knowing which experts to get on side and how to mitigate your risk, he reveals how commercial investing may not be as ‘risky’ as investors may think from the outset.
In the latest episode of Your Investment Property’s YIP Talk podcast, O’Neill sits down with host and magazine editor Sarah Megginson to discuss what contributes towards the ebbs and flows of the commercial sphere and how these can consequently influence a return on investment.
For investors who are moving over from the other side of the fence from residential to commercial investing, whether it’s to maximise their profits or expand the diversity of their portfolio, it can quickly surface that residential and commercial have their individual nuances. Yet, they also have their meeting points – especially when it comes to the strategies that branch out from supply and demand.
“A lot of people forget how similar investing is for residential and commercial. You're not going to buy a commercial property if it's in the middle of nowhere; just like you wouldn’t with residential. So, it's important to [buy property] placed near where basically jobs are,” O’Neill shares.
“It comes down to the affordability of the land as well. Both land values and rents get higher as you get closer to the city and in general, the same rules of residential apply with commercial in this respect.”
Those who have only ever invested in residential may find themselves veering away from commercial, even though they have heard of the higher-yield opportunities on offer. Unfamiliar territory can require some confidence.
However, O’Neill explains, there are often less risks involved in a commercial purchase; it is a more concrete and longer-term lease structure, to begin with. Provided that the investor has employed the diligent thought-process in researching their commercial investment, the risks can be low, which he further explores in the podcast.
“There's a lot more uncertainty with residential, and you are at the mercy of the market. I tend to think [commercial is] a lot more predictable and stable, and honestly, a lot quieter as well,” he points out.
“With commercial, you're going to be getting an income month-to-moth. If the growth happens, that's great and it will happen if your rent [is] growing and you're in a good built-out, in-demand area. But you're going to be getting a strong income, and that's a return on your money, and then the growth will come in time.”
The question must also be asked: which tenant is the most secure and profitable?
According to O’Neill, industrial real estate has shown to have a degree of safety tied to it, largely due to the wider range of options it presents.
“One of the main reasons for this is, it's a cheap per square meter for a space for businesses, especially those types of properties that have a mezzanine in it. You can actually use them as an office as well,” he shares.
“So, you see a lot of electrical contracting or engineering type of businesses who use warehouse space for an office because they basically get more per square meterage for the same money. And a lot of business just doesn’t need to be up in an office tower as well.”
Retail on the other hand can be more specific, which can cause “longer lengths in between tenants”, O’Neill adds. And when it comes to office rents, particularly in Sydney, new transport plans have propelled demand.
“In a few years, they're going to have more floor space hit the market and we're going to see [office] rents possibly stagnate in a number of years,” he adds.
To find out how you can generate a steady income and bolster your investment portfolio through commercial investing, listen to Scott O’Neill’s full episode on the YIP Talk podcast.