Real estate is one of the most popular asset classes for investors. Owning residential real estate, in particular, has been a primary goal of New Zealanders for generations – mostly in the form of a family home. The ongoing demand for property in this country has made real estate synonymous with a stable, ever-growing asset.
The financial services industry is constantly coming up with innovative new products for retail and wholesale investors that help them invest in the property market. While most people are familiar with investing in residential real estate, commercial real estate can offer equally attractive – and often better – returns.
Savvy investors can increasingly take advantage of the unique benefits offered by commercial real estate. As always, however, it’s vital to understand the risks and returns that different investments offer when you choose where to allocate your capital.
Here are two advantages of investing in commercial real estate:
1. Potential higher returns
One of the biggest advantages of investing in commercial real estate is that they can generate healthy returns relative to other types of investment. These returns come in the form of current rental yields, as well as capital gains over the long term.
Commercial property investment can often provide greater rental yields – in the range of 5-10% – compared with the returns offered by residential properties – at about 3-5%. As rental yields are a percentage of income to the total cost of a property, these yields decrease in desirable locations where property values are high and rising. Lower rental yields can, however, be offset by the returns offered by an increase in the value of the commercial real estate investment over time.
As an example, commercial locations in Auckland have seen some significant capital gains due to high demand over recent years. These capital gains are essential for investors, as they create additional value on the underlying assets and can provide a safer investment over the long term.
2. Protection provided by a commercial lease
Much of the benefit attributed to commercial real estate comes from the lease agreements signed by the owner-investor and the tenants. The first benefit of a commercial lease agreement comes in the form of lower maintenance costs for the owner.
In many cases with commercial real estate the burden of the cost of repairs, maintenance and property management fees fall on the tenant, rather than the owner. This is different to residential real estate agreements, where the landlord pays these costs. This naturally reduces the returns generated through the rental yields of residential property, compared with commercial real estate.