7 Commercial Property Investment Mistakes to Avoid in Australia

One of the biggest mistakes new investors make is focusing entirely on the advertised yield.

You might see:

High-yield commercial property  8% return!

That number may look attractive, but it does not tell you everything about the investment.

> A high yield could be associated with:

• > A short remaining lease
• > A financially weak tenant
• > A property in a weaker location
• > High vacancy risk
• > Significant maintenance requirements
• > Below-market property value
• > Upcoming capital expenditure
• > A specialized property that is difficult to re-lease
• 
  
• What should you examine instead? 
• 
  

Look at the relationship between: 

Yield + Tenant + Lease + Location + Property Quality + Risk

For example, a 6% net yield from a strong tenant on a long lease may have a very different risk profile from an 8% yield from a property where the tenant's lease expires soon.

The highest yield is not automatically the best investment.

When you buy commercial real estate, you're not simply buying a building.

You're buying an income stream backed by a tenant and a lease.

This makes tenant quality one of the most important considerations in commercial property investment.

Before purchasing, investigate:

• > Who is the tenant?
• > How long has the business operated?
• > How financially stable is the tenant?
• > How long remains on the lease?
• > Are there options to renew?
• > How often is rent reviewed?
• > Is the tenant paying rent on time?
• > What security or bank guarantee is provided?
• > How dependent is the property on one tenant?
• 
  

A beautiful commercial building can still become a poor investment if the tenant leaves and the property sits vacant.

This is one of the most expensive mistakes a commercial property investor can make.

The lease determines much of the property's income profile.

Before purchasing, you need to understand:

1 . Lease term

How many years remain?

2. Rental reviews

How and when can the rent increase?

3. Renewal options

Does the tenant have options to extend?

4. Outgoings

Which expenses are paid by the landlord and which are recoverable from the tenant?

5. Maintenance responsibilities

Who is responsible for repairs, building services and major works?

6. Make-good obligations

What happens when the tenant leaves?

7. Incentives

Has the tenant received rent-free periods, fit-out contributions or other incentives?

A property marketed with a particular rental income should never be assessed purely from the marketing brochure.

Read the actual lease.

And where appropriate, have it reviewed by a qualified property lawyer before proceeding.

A commercial property can look highly profitable when it is fully occupied, but commercial property vacancy risk in Australia can quickly change the numbers. One of the biggest mistakes investors make is calculating returns based on continuous rental income without considering what happens when a tenant leaves. Finding a new tenant can take months and may require advertising, leasing commissions, legal fees, rent free incentives, fit out contributions, repairs, refurbishment and other leasing costs. During this period, the property owner may still be responsible for loan repayments, insurance, council rates, maintenance and property management expenses while receiving little or no rental income.

This is where a seemingly strong commercial property investment can put pressure on an investor’s cash flow. 

Before buying commercial property in Australia, investors should stress test the investment for different vacancy periods and unexpected leasing costs. Ask yourself: Could I continue covering the property’s expenses if the tenant left tomorrow and the property remained vacant for several months? If the answer is no, the investment may carry more commercial property investment risk than the headline rental yield suggests.

Leverage can increase an investor's exposure to commercial property, but it can also magnify losses and cash-flow pressure.

Commercial property investors need to consider:

A commercial property does not need to be in the most expensive area to be a strong investment. What matters is sustainable tenant demand. When buying commercial property in Australia, assess the location based on the property type, including transport and freight access for industrial property, foot traffic and demographics for retail, public transport and employment hubs for office property, and healthcare demand and accessibility for medical property.

Do not only analyze today's demand. Consider how infrastructure projects, population growth, new developments, zoning changes and competing supply could affect the area over the next 5–10 years. A good commercial property location should support long-term tenant demand, rental income and investment performance.

This may be one of the most costly mistakes in commercial property investing in Australia. Never buy commercial property based solely on an agent’s presentation or the advertised rental yield. Proper commercial property due diligence should cover the financials, lease, physical condition, legal position and local market. 

Check current and historical rental income, expenses, lease terms, tenant obligations, building condition, structural issues, zoning, planning restrictions, comparable rents and sales, vacancy and future supply. A property can look attractive on paper while hiding significant risks and costs. Thorough due diligence helps investors understand the true income, expenses, risks and potential of a commercial property before committing their capital.

Before purchasing a commercial property in Australia, work through this checklist.

Commercial Property Investment Checklist

Tenant

• Is the tenant financially stable?
• How long is left on the lease?
• What is the tenant's industry outlook?

Lease

• What are the rental reviews?
• Who pays the outgoings?
• What happens when the lease expires?

Property

• Is the building in good condition?
• What capital expenditure may be required?

Location

• Is tenant demand sustainable?
• What competing supply is coming?

Income

• Is the quoted income gross or net?
• Are there incentives affecting effective rent?

Finance

• What happens if interest rates increase?
• Can the property support its debt?

Exit

• Who would buy the property from you?
• How liquid is the asset?