A Comparison between Residential Property & Commercial Property Investment
House prices are frequently discussed in Australia, and it is common for investors to inquire about the differences between investing in commercial retail assets, like Initium, and residential homes. While similarities exist, such as the importance of acquiring property in the right location for long-term capital growth, notable differences highlight the complementary nature of these assets within a diversified portfolio.
Discover Initium’s Commercial Retail Assets
Rental Yields
When investing in property, investors seek a total return through a combination of yield (rental income) and capital growth. On average, commercial assets provide a higher rental yield than residential properties, attributed to the widespread popularity of residential real estate and the elevated yields observed in some commercial segments, such as office towers.
Initium’s focus shares similarities with high-quality residential homes. Located in premium areas, scarce, and challenging to replicate, Initium’s assets are highly sought after by tenants, resulting in low vacancies. Consequently, the yield is closer to that of residential assets than commercial office towers.
Leverage
Leverage or Loan-to-Value Ratios (LVRs) can vary across both assets, with residential mortgages reaching as high as 90%. In contrast, Initium aims for reduced risk through negligible to low levels of leverage (no more than 30%). With comparable yields and minimal leverage, Initium’s assets maintain positive cash flow. Additionally, high occupancies allow for predictable monthly distributions, positioning the assets for long-term capital growth.
Rent Increases
Residential leases, including the rental amount, are typically set for a period of time, 6 to 12 months. The duration of tenancy often reflects the ease of substitutability – a house is a house, and a tenant is likely to depart if unhappy with an increase in rent. In contrast, commercial leases are typically 3 to 5 years and usually incorporate fixed annual rent increases, linked to CPI, or a fixed annual rate, typically ranging from 3-4%. Sites are typically designed for a specific tenant, for example supermarkets, fast-food chains, or pharmacies. Tenants therefore have far fewer options available.
More so, even after a lease term ends, tenants are reluctant to depart, influenced by familiarity and client loyalty. This, coupled with the scarce attributes of commercial retail assets, underpin their value and the ability to pass through rent increases.
In conclusion, Initium’s approach to commercial retail offers a resilient and compelling commercial property investment opportunity:
- Premium locations
- High tenant demand
- Minimal leverage
- Lease terms with fixed rent increases
- Predictable and growing yields
- Avoiding structural issues of larger commercial sectors like office towers.
Inspired by these commercial property investment insights?
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To get in touch with our Investment Team click below or contact us on 1300 140 486, alternatively please email us at investorrelations@initium.com.au
