1. Increased Vacancy
It’s not uncommon for commercial properties to have long vacancies, which means you will need to cover all the costs during this period. Commercial property can sit vacant for 6 months or more whilst waiting for the right tenants.
And for anyone that lives close to a “High Street” of shops you will probably have witnessed both ends of the scale, with successful businesses leasing for years and alternatively shop fronts that are frequently empty because they just can’t seem to get the right long term tenants!
So you need to be prepared and have a cash buffer available to cover a property’s outgoings without the support of rent.
2. Complicated Lease Terms
While there’s little variation between residential leases, the difference between commercial leases can be huge, with pretty much every term up for negotiation. Consequently, commercial investors have to work very closely with their lawyers when drawing up a lease.
3. Upfront Capital Required
Whilst there is a real price range in commercial properties, depending on location and type (retail, cafe, office, factory, warehouse, etc.) the one thing they all have in common is that banks and lenders all want more money upfront.
Banks consider commercial properties higher risk and therefore their LVR (Loan Value Ratio) is lower. When borrowing for a residential property you can borrow up to 90/95% of the property’s value but for a commercial property is not uncommon for the lender to require a 30% to 40% deposit, therefore only lending 60-70% value.
We recommend you engage an experienced commercial mortgage broker to get you the best deal based on the security type and your risk profile.
4. Reduced Capital Growth
Whilst you can find ‘experts’ to argue this point, either way, the majority agree that commercial properties typically experience slower rates of capital growth than residential properties.
The capital growth of commercial properties depends on a number of factors and can be significant either way. In contrast, any price falls associated with residential properties are generally less dramatic and usually, happen progressively over a longer period of time.
5. Economic Conditions and Infrastructure changes
Commercial property is more susceptible to economic shock. Demand for business goods and service can fluctuate dramatically based on the strength of the economy. Demand for commercial premises usually falls during an economic downturn, but people always need a place to live.
In addition, as the pool of tenants is smaller new property coming on the market in the same area can reduce your pool further and even existing tenants may look to upgrade or expand.
Changes in infrastructure can be positive and negative, improved infrastructure can attract tenants to the area, but it can also lure tenants from existing areas if other areas are benefitting from roads, transport or other major upgrades.