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Commercial Investment Made Easy In Sydney The Key Step Commercial Property Investment Formula

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COMMERCIAL INVESTMENT MADE EASY IN SYDNEY: THE 10-STEP COMMERCIAL PROPERTY INVESTMENT FORMULA AUGUST 2019 BY EVELYN CONISBEE (PROPERTY EXPERT) Abstract While many are sceptical of investing in commercial real estate due to the perceived higher risk (compared to investing in residential property), commercial property can provide significant cash flow benefits, greater rental certainty due to longer rental periods and fewer ongoing expenses. If you do your research, practise due diligence and understand the risks involved, commercial real estate could be a valuable addition to your property portfolio – an option that you may not have previously had on your radar. I. Introduction Residential property continues to be one of the most popular forms of investment in Australia but far fewer venture into commercial property. Is it something that you should be considering? Like residential, the performance of commercial can be highly variable between capital cities and between suburbs. Right now, there is a lot of money targeting commercial, including money from overseas. Hence, yields are declining across most asset types. However, there is a lot of difference in tenant demand and this may influence where you decide to buy. For office and industrial space, rental growth primarily depends on the state of the economy. High levels of development also make a difference. The city with the strongest office and industrial demand right now is, not surprisingly, Sydney. Although it is an expensive city for occupiers, a prolonged period of under-building has meant that the surge in tenant demand has left not enough space and resulted in strong rental growth as tenants compete to occupy the best properties. For both office and industrial, Sydney now has the lowest vacancy. II. Should You Consider Investing In Commercial Property The performance of retail property tends to be more variable and not necessarily linked to a state's economic growth. You need to consider the local trade area and surrounding competition, instead. Expansion of large shopping centres can make a big difference to the performance of small shopping centres. Similarly, population increases can lead to greater sales for a centre. Chart 1: Office tenant demand in Sydney is back, more mixed elsewhere (office vacancy rate, January 2017) Some regional areas are also worth looking at. Central Coast in NSW is currently seeing high levels of tenant demand from office users on the back of white collar migration because of Sydney's affordability problems. Small shopping centres pretty much anywhere are worth considering, even in very remote locations. Asset types While a large regional shopping centre is clearly out of reach but for a handful of investors, there are a lot of options to consider. One reason investors decide to invest in commercial is to get access to higher-yielding investments, a challenge for many residential investors. Diversification can also be a driver with many people moving on from residential investment to commercial. For many commercial property types, performance can often be linked to quite different factors that drive residential performance. A shop on a retail strip is one of the more popular forms of commercial investment. Buyers tend to like the ability to see their investment operating and feel some control over the type of tenant that they lease to. As a result, yields for this sort of investment tend to be lower, similar to residential levels. This type of investment can also be impacted by expansions of nearby shopping centres, as well as the location of the shop within the retail strip. Ideally choose somewhere with high traffic. Small industrial properties are also popular with high yields making these popular. If you are familiar with an industrial precinct and the types of tenants that typically occupy the precinct, then this is worth considering. Some investors have done very well buying inner urban industrial, holding and then getting a permit for residential. Changes to planning rules in place like south Sydney have meant that many owners have done very well over time. While an entire office building is generally out of reach for many private investors, strata offices can perform well and attract high yields. In places like inner Sydney at the moment, tenant demand for this is particularly high, as well as outer suburban areas of Sydney. Chart 2: Commercial yields on a national level, 2007 to end-2016 Given the high average cost of commercial property, forming a syndicate can allow you to move into higher price points which can sometimes perform better. Neighbourhood centres, a shopping centre anchored with a supermarket and specialty shops, is generally one of the better performing property types, particularly in growth areas. The price of these is however generally well over $15 million, which is out of reach of many private investors. For experienced residential investors, commercial property is definitely worth considering. But just like any property investment, understanding the drivers of demand and doing your research is critical to getting the best yield and capital growth. (Source: https://www.investsmart.com.au/investment-news/should-you- consider-investing-in-commercial-property/139007 ) Is Now The Right Time To Invest In Sydney? The Sydney market has now been widely accepted as close to bottoming out, and the nation’s leading economists expect a slow and steady recovery. During this period, the markets in Sydney which are most concerning to Mr Glossop are house and land packages, particularly those which are in Sydney’s south-west region. A significant portion of the NSW Government’s infrastructure spending in Sydney to date has been directed towards the south- west of Sydney and the north-west corridor. “Those are the ones which scare me the most,” Mr Glossop said. “People got caught up in the hysteria.” He noted the house and land packages are often a considerable distance from city centres and infrastructure, because they were built on the “next bastion of available land” on the outskirts of Sydney. Mr Glossop’s message to investors is consistent and simple: the basics of supply and demand in a region should be thoroughly considered, personal finances and cash flow need to be comprehensively considered, and investors should not act out of panic or fear in a heating up market. The road to recovery In CoreLogic’s most recent home values index, Sydney recorded a values spike of 0.2 per cent, after consecutive months of plummeting into the sharpest downturn since the Global Financial Crisis. Although there are signs of life, CoreLogic’s Tim Lawless cautioned investors against expecting massive capital gains, as were experienced prior to the 2016 downturn. “Housing credit polices remain much tougher than they were prior to the [banking] royal commission as lenders continue to move away from the Household Expenditure Measure and examine borrower spending behaviours and expenses more closely,” Mr Lawless said. “Also, lenders now have the benefit of comprehensive credit reporting whereby borrower debt profiles are more transparent, providing lenders with the ability to assess credit worthiness in more detail,” he said. “The ongoing tightness in housing credit is expected to keep a rapid rebound in housing values at bay, despite the lowest mortgage rates since the 1950s,” he said. (Source: https://www.smartpropertyinvestment.com.au/buying/19900- is-now-the-right-time-to-invest-in-sydney ) Top 7 Locations for Commercial Real Estate in Sydney Sydney, the capital city of New South Wales, is listed on the 15th position in top 16 Global Elite Cities Index. The fastest growing economy, current performance in the business sector, cultural enhancements, human capital, commercial setups, infrastructural developments and political engagement are some of the key reasons behind the success of this metropolitan city. World’s recognised brands, leading entrepreneurs, and start-up business owners –all are investing their capital in Sydney’s commercial real estate market. In fact, some reputed real estate development giants are developing new-age commercial buildings using augmented technology to make this city more apt for businesses. Whether it's about finding a commercial property for sale or lease in Australia, Sydney is always among those cities that remain on the top of the list. The city offers both the domestic as well as international companies a highly apt business environment, cutting-edge infrastructure facilities and a broad customer base – which is perfect to generate sales and expand the business in the right direction. While leading corporate companies are looking for expansion in Sydney, small business owners are still searching for the right location for their commercial space. If you are among those and finding difficulties in making the most suitable decision, then this blog post is for you. Here is the list of top 7 locations for a commercial real estate in Sydney that can help you run your business smoothly and efficiently. 1. Sydney CBD, NSW The Sydney Central Business District (CBD) is the main commercial hub of Sydney, New South Wales, Australia. It is just 3 km southwards from the Sydney Cove – which is the first point of European settlement. Being Australia’s prime economic and financial hub, business owners all around the world are investing their money in Sydney’s commercial real estate for higher productivity and better outcomes. The best part about this particular location is that it employs around 13 % of Sydney’s workforce and produces approx. $64.1 billion worth of products and services every year. Apart from commercial hub, the city centre also hosts the nation’s nightlife and entertainment events. The city centre is perfect if you are looking for commercial space in the hotspots of Sydney. 2. Surry Hills, Sydney, CBD Surry Hills is an inner suburb of Sydney, New South Wales, Australia. The suburb city offers some of the amazing infrastructure amenities, smart buildings and flexible market conditions that make it perfect for commercial set up. The location is south-east of the Sydney CBD and surrounded by the suburbs like Paddington, Darlinghurst, Chippendale, Haymarket, Moore Park, etc. The commercial real estate in Surry Hills is in demand, and new-age business owners are investing more in this highly-scalable and productive location. 3. Newtown, Sydney, NSW Newtown is also among those locations where people are ready to invest their capital in commercial property. It is located just 4 kilometres south-west of the Sydney CBD, which is great for small business owners and start-up entrepreneurs. While the location has robust retail prospects, you can buy commercial spaces on lease for your restaurant or café based business at the most the affordable price. There you can find high-quality and new-age commercial buildings that are spacious and beautiful. If you want to start your entrepreneurship or expand your business in the next five years, then Newtown is the perfect location for you. 4. North Sydney, NSW North Sydney is the main business district, located on the lower north shore of Sydney, NSW, Australia. It is just 3 kilometres away from the Sydney Central Business District. The commercial district of North Sydney has the most lavish and reputed offices buildings in NSW. There you can find a range of real estate developments including industries, warehouses, restaurants, cafes, retail shops, and a lot more. Leading corporations whose offices are in this particular location includes, AAMI, Symantec, Microsystems, Hyundai, Vocus Communications, Cisco Systems, etc. In a nutshell, from top-notch infrastructure developments to new-age commercial spaces, the suburb has everything to make your entrepreneurial journey a success. The accessibility is super-amazing, and people can commute via trains and buses as North Sydney is directly linked to the Sydney Harbour Bridge. 5. Parramatta, Sydney, NSW Parramatta’s commercial real estate market is doing well these days. Being one of the most prominent suburbs of Sydney, it offers tons of benefits to those who want to start up their business or grow their dimensions. The suburb is often regarded as the second most popular CBD of Sydney – thanks to the infrastructure developments, transportation accessibilities, public transport facilities and ever-growing market conditions. Most of the reputed companies are relocating to Parramatta to enjoy the competitive business environment and diverse customer base. 6. Marrickville, Sydney, NSW Marrickville is a perfect location for those who are looking for an official space in Sydney. It is considered as one of the best commercial hubs, offering beautifully-developed, spacious and architecturally appealing real estate developments at the most convincing price. In the next few years, the suburb is expecting the construction of some new commercial projects to make this place more happening for the business environment. 7. Alexandria, Sydney, NSW An inner-city suburb of Sydney, Alexandria is offering world-class amenities, smart buildings, high-end transportation facilities and harbour views at its best. Just 4 km south to the Sydney CBD, it encourages business owners of all types and sizes to invest in their commercial real estate market. If you are looking for spacious office space in the prime location of Sydney, then Alexandria can be an ideal option for you. It hosts all types of commercial real estate developments, including office space, industrial warehouses, showrooms, land lease, Retail Shops and a lot more. Alexandria is mostly known as an Industrial suburb in Sydney, and you can consider this location if you have an industry or need a warehouse for your business. There you can find hundreds of industrial spaces for sale and lease at the most affordable prices. III. Questions You Must Ask Before Investing In Commercial Property Commercial real estate investments have the potential to provide investors with hassle-free high NET yields and healthy capital growth potential. This is a draw for any investor. There are, however, some key questions to ask to ensure that you’re working with a quality and secure investment. 1. Is There Sustained Demand? This is a crucial aspect of any development as high, sustained demand will ensure that your investment remains attractive in the long-term, maintaining yields, ensuring ease of exit and improving capital growth potential. 2. Is It A Good Location? It goes without saying that location is a key component of any real estate investment. The same is true for commercial real estate, although the rules are slightly different. 3. Do The Guarantees Make Sense? The first thing to consider with regard to the security of a property’s guaranteed income period is to ensure they make sense. Make local comparisons with other properties regarding rental demands and assess the demand for such a property in a specific location. 4. Can I Trust The Developer? Regardless of how good a location might be, if the developer is of poor quality or inexperienced in their trade, the property may have limited profit potential. The available yields in commercial real estate have attracted a lot of new and inexperienced developers, who must be avoided. 5. What If I Need Access To My Money? A flexible exit strategy is an absolutely crucial element in any commercial real estate investment. Although the sustained attractiveness of your investment property is a major element of this, the specific investment conditions you agree to also have a huge influence. 6. Does It Fit With My Objectives? Two key elements of security that some investors overlook is:  How well an investment suits their own objectives  What place it will take up within an existing portfolio. What might be a great investment for one investor may not suit another. Also keep in mind that diversity is important, and commercial property offers a great opportunity to achieve this without investing a fortune. 7. What Are The Risks? A key aspect of a successful investment is mitigating risk. In commercial property, this can be achieved by considering all of the above, while also ensuring that contracts are robust and asset-backed (it is common for developers to set up third-party shell companies through which they underwrite guarantees – this is highly insecure, as they commonly have zero assets). By asking the questions outlined above, you can go quite a ways in ascertaining whether an investment is secure, profitable and right for you. IV. How to Make a Smart Investment in Commercial Property in Sydney Investing in commercial property is a great opportunity, but it means more than just accepting checks from tenants. “Property owners must pay attention to the asset to make sure it stays in good shape — both in terms of structure and occupancy — because eventually it will be sold,” says George J. Pofok, CCIM, SIOR, senior vice president at Cushman & Wakefield/CRESCO Real Estate. Smart Business spoke with Pofok about what first-time investors in commercial property should know before committing to a deal.  What should investors understand about investing in commercial property? It’s important first to understand the market being considered and the type of product — industrial, retail, commercial office — for investment. When it comes to location, investors should study the market to understand the difference between the value of the bricks and mortar vs. a property’s cash flow potential. For instance, if the building goes vacant, the investor should determine ahead of time the rent that can be charged when backfilling the property. If the occupant companies at the time of the investment are paying $7 per square foot, but the true value of the market if a new tenant were to enter is $4, then the investor will need to account for the disparity between what’s being paid now and what the market will bear.  Does investing in commercial property mean becoming a landlord? Investing in a commercial property usually means becoming a landlord. There are absolute triple net investments through which tenants are wholly responsible for the property, but with most investments investors are responsible for the maintenance and upkeep of the main building components. This is something investors need to understand from the start. They won’t just get a check every month. They will have management oversight responsibilities.  Where should someone interested in investing in commercial properties start? Start by consulting with a real estate practitioner to find out what investment opportunities exist in the market — currently, industrial and multifamily are generating a lot of investor interest in the Northeast Ohio market. There are many outside investors buying into Cleveland and other Tier 2 cities, principally because the rate of return is higher than they’d get in Tier 1 markets like Chicago or Los Angeles where there’s a lot of competition, which is driving down the cap rates and creating higher barriers of entry. Real estate practitioners have a complete database and market knowledge. They can also connect investors who are looking to partner with others on larger properties or building larger portfolios.  How long until investors realize a return? Investors can make a return in that first year, as long as they invest intelligently. But how long an investment is profitable depends in part on market conditions. In today’s conditions, there is limited product and lots of investors chasing deals. Acquisition prices are high compared to recession prices, the latter of which led to conditions where cash was king and property owners were willing to take less money to solve a problem and get out.  Who should first-time investors work with? Talk to an attorney to make sure the corporation used for investing in commercial property is set up appropria
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