Government changes to house-buying rules have sparked a flurry of interest in commercial real estate, with a national agency executive reporting “the most inquiry I’ve seen in my career” from residential investors.
The country’s commercial real estate giants, Colliers and Bayleys, both say the new regulations on residential purchases significantly tip the scales in favour of investment in commercial real estate.
Ryan Johnson, Bayleys national director commercial, says since the announcement his company has had significant inquiries from residential investors looking at commercial options across the country.
“The reasons for that are multiple. If you look at an investor’s decision-making, it’s firstly around the gross income of the property. Where residential returns or yields have been around 2-3 per cent, commercial are around 4-6 per cent.
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“If you look at the expense side of the investment equation, the removal of interest deductibility on residential is an issue. Equally from a non-cash perspective, the reintroduction of depreciation is another significant advantage to commercial.”
Commercial owners can depreciate buildings, fixtures and fittings; residential investors cannot.
Johnson says these income, expense and depreciation advantages are being translated into the levels of inquiry. So too, the brightline test for residential properties which hasn’t been applied to commercial real estate.
Other factors influencing investors include the obligations of residential landlords around healthy home regulations, which Johnson cites as another significant cost imposed on residential but not commercial landlords.
“The other element that has changed significantly is the LVRs. With residential moving toward 40 per cent LVR, it puts in more in line with commercial, therefore it’s an even playing-field when considering deposit size and entry to that real estate sector.”
Johnson has noticed canny residential investors diversifying their portfolios into commercial real estate as the residential yield has decreased over the last three to four years. He expects that to accelerate with the tax changes and new legislation.
Ian Little, Colliers associate director of research, thinks the package of new regulations will give residential investors pause for thought.
He expects it to take some heat out of that market, particularly in the short term, as investors weigh up their options and try to educate themselves on the fiscal implications.
“Quite clearly I think we are going to see that investors who may have been considering expanding or moving into residential prior to the changes in the regulations may well look at a broader range of assets now, and try and weigh up different advantages and disadvantages.”
Little says residential investors will likely be considering the regulations’ effect on new-builds against existing housing stock.
“Certainly, the playing-field has been tilted towards purchasing new-build with some of the regulations not having such a wide-ranging impact on that. That is an area in which investors are going to have to weigh up the difference into greater consideration of alternative investment assets, which would certainly include commercial property.”
The brightline test on residential sales, depreciation claims and possible interest deductions for commercial property are advantages for potential commercial investors to take into account.
He points out there are a number of ways of getting involved in the commercial market. “There’s direct purchase of a commercial premises, whether it be industrial or retail or office, or alternatively looking to buy into proportionate ownership of a commercial property via syndication, or purchasing into a property fund, which are promoted by a number of different organisations.”
Little points out investment in commercial property is a different ball game from residential property and counsels due diligence.
“Purchasing and managing commercial premises presents different issues from residential premises, which people may be much more familiar with.
“Certainly we think that we will see an increase in interest in commercial assets as a result of these changes in rules, but people are going to have to get advice on that and certainly conduct their due diligence, particularly around the type of tenants in the property.
“You’ve got to weigh up the tenant strength and how long they are committed to the property, and things like rent review clauses and that type of thing. So there’s certainly a high level of due diligence that is required when purchasing commercial premises.”
