The recent Federal Budget announcement around changes to negative gearing is making investors reconsider their next purchase. Over the last several years as residential returns compress, many investors have already made the shift to commercial property investment, however, this trend is only increasing after recent changes to negative gearing.
For years, residential investors have relied on capital growth to justify low rental returns and increasing holding costs. Commercial investors, by contrast, have focused on both income and growth. Despite many believing commercial property has inferior capital growth compared to residential property, this actually isn’t the case in certain market segments.
The $1 Million Comparison
Consider two investors purchasing a $1 million property.
The first purchases a residential investment generating a gross rental yield of 3.5%.
The second purchases a light-industrial property generating a 5.75% net yield.
At first glance, the difference may not seem significant. However, the numbers tell a very different story.
The residential property generates approximately $35,000 per year in gross rent. From this income, the owner must pay council rates, insurance, maintenance, property management fees and other holding costs.
The industrial property generates approximately $57,500 per year net. In most industrial leases, the tenant pays 100% of the outgoings, including rates, water charges, insurance and other property expenses.
The result is an annual income difference of more than $20,000 before considering the residential property’s ongoing ownership costs.
Over a five-year period, assuming similar capital growth, the industrial investor could be ahead by well over $100,000 in additional rental income alone.
This is one of the primary reasons sophisticated investors continue to favour commercial property despite the popularity of residential real estate, with certain commercial markets, such as the SEQ industrial market being one of the strongest performing commercial property markets in the country, receiving interest from institutional investors through to mum and dad investors.
SEQ’s Industrial Market Continues to Strengthen
The strongest opportunities continue to emerge throughout Brisbane’s western corridor and along the M1 industrial precincts. Locations such as Loganholme, Seventeen Mile Rocks and surrounding industrial markets continue to experience strong demand from owner-occupiers, logistics operators, trade businesses and investors due to access to major road infrastructure and population nearby growing population corridors.
Population growth across SEQ, combined with significant infrastructure investment and limited industrial land supply, continues to place upward pressure on both rents and values.
While residential markets often experience periods of oversupply, quality industrial assets remain scarce, particularly in established precincts close to major transport corridors.
Real Clients, Real Results
We continue to see these market fundamentals reflected in client outcomes.
Last year we assisted Miacor IT Founder and Managing Director Mark Smitts in purchasing their first commercial property in Seventeen Mile Rocks.
At the time, the purchase provided the business with a long-term operational base while allowing them to build equity through ownership.
Since settlement, a recent comparable sale within the same complex indicates the property’s value has increased by almost 15%, reinforcing the strength of Brisbane’s western industrial market reflected through increasing land values due to short-supply and increasing demand.
As Mark noted following the purchase:
“GeoBuyers gave us confidence and made the process very easy. Their guidance, advice and diligence helped us find the perfect property.”
Investor demand remains equally strong.
Recently, we assisted a client in acquiring a light-industrial investment property for approximately $1 million. By structuring the transaction as a Going Concern through the implementation of a commercial tenancy agreement, the purchaser avoided approximately $100,000 in GST that would otherwise have been payable at settlement.
That is an immediate six-figure saving before considering future rental income and capital growth.
Owner-occupier activity has also accelerated.
A growing Brisbane plumbing business recently engaged us to secure an industrial premises in Brisbane’s western corridor. Within two weeks we identified, negotiated and secured a suitable property for more than $50,000 below the asking price.
The transaction was also structured as a Going Concern, allowing the purchaser to avoid GST and preserve valuable working capital that could be reinvested into the business.
The Opportunity Ahead
The Budget may be drawing more attention to commercial property, but the underlying reasons investors are making the switch have not changed.
Commercial property offers:
- Higher rental returns
- Tenants paying outgoings
- Longer lease terms
- Annual rental increases
- Stronger cash flow
- Lower management intensity
- Exposure to South East Queensland’s growing industrial economy
For investors comparing a $1 million residential property yielding 3.5% against a $1 million industrial asset yielding 5.75% net, the question is increasingly becoming less about tax and more about performance.
When income is significantly higher, holding costs are lower and capital growth remains strong, industrial property is proving to be one of the most compelling investment opportunities available in today’s market.
As demand continues to build throughout Loganholme, Seventeen Mile Rocks and Brisbane’s broader western corridor, investors who act early may be best positioned to benefit from the next phase of growth.
Contact us today to understand how we can help turbocharge your portfolio!