A young woman in her 20s recently snapped up her first property – it was a ground floor shop leased to a jewellery business in South Melbourne.
The buyer, who declined to be identified, paid $900,000 and will earn income equivalent to a 5 per cent yield for her efforts.
Another first-time commercial buyer, Mark Murray, was priced out of the residential market for the type of property he was looking for and instead opted for a two-storey shop in High Street Northcote, in Melbourne’s inner north.
Both buyers are part of a growing cohort looking at entry-level commercial properties as an alternative to the well trodden path of homeownership.
Sky high residential values – Melbourne’s house prices were up 15 per cent year-on-year in September – and changes to Victoria’s residential rental laws are pushing some would-be owners to look at alternatives.
Buyers are finding that the returns on residential real estate are so poor – with yields in the range of 1 or 2 per cent – that they prefer to buy something that will give them 3 to 5 per cent, which is commercial property.
Barry Novy from Gross Waddell ICR
The state’s new tenancy laws, introduced in March, have put a fresh onus on residential landlords: banning rental bidding, introducing minimum rental standards, changing eviction rules, and allowing modification of homes by renters – all of which has sharpened the difference with commercial property, real estate agents say.
Mr Murray said he planned to live in the upstairs section of his High Street property and turn the downstairs into artists’ workspaces and a recording studio. The shopfront, next to Sweet Life Tattoo, sold through Fitzroys’ Ervin Niyaz.
Mr Murray said it was a privilege to be able to buy something and share it with the creative community. “I’ll definitely earn an income but probably not as high rent as other places.”
The overheated housing market and superior rental returns are driving people towards commercial real estate, Stonebridge Property Group’s Dylan Kilner said.
The Dorcas Street building that sold in South Melbourne has a three-year lease to Unique Diamonds with fixed 3 per cent annual increases. Its outgoing expenses are also paid by the business tenant.
By contrast, residential leases are usually limited to one-year and have no set increases in rent with landlords required to pay outgoing expenses like extra water charges, taxes and maintenance costs.
“The buyer was a first-time investor who opted for an entry level commercial investment rather than a residential property,” Mr Kilner said.
Gross Waddell ICR’s Barry Novy said buyers should do their homework before taking the plunge into commercial property because of differences between the property classes.
“Buyers are finding that the returns on residential real estate are so poor – with yields in the range of 1 or 2 per cent – that they prefer to buy something that will give them 3 to 5 per cent, which is commercial property,” he said.
However, commercial property has a greater risk of long periods of vacancy, depending on market conditions. “You’ve got to be able to cover that,” he said.
Leasing contracts in the sector are also more complicated to negotiate and administer.
