Most discussions we’ve had with clients in the past at Long Property have been about residential property…
Buying a first home. Maybe refinancing to release equity, or to improve cash flow, or to fund renovations, or to purchase an investment property. Eventually upgrading to a larger family home.
But with many clients at Long Property now (many professionals and small business owners, many clients entering their 40’s and 50’s), we’re starting to talk a lot more about commercial real estate.
There are a few trends all converging at the same time which I’ll expand on below.
Long Property Commercial has exceeded our expectations
The biggest change has come from within our own business.
As many of you know last year we launched ‘Long Property Commercial’, a business dedicated exclusively to commercial and business finance.
Our clients were increasingly asking for assistance with commercial property purchases, business lending, equipment finance and property development funding.
We’d always been able to help, but admittedly not with the same market leading level of expertise or support as we could on the resi side, and this is why we partnered with Yan to lead the business.
Yan Robins spent twenty years in business banking with NAB and ANZ, including in exec roles running business banking teams.
Yan’s knowledge of commercial lending is strong, but even more important is the way he approaches clients. He has a genuine desire to help people, and he strives for service excellence like few others I’ve ever seen.
So as a business we are now helping clients buy warehouses, medical suites, office buildings, retail premises, etc.
We are arranging funding for business purchases/ M&A, equipment purchases and commercial developments. We are introducing clients to lending strategies and funding options they didn’t know existed before.
It has reinforced something I’d felt for a long time, and which had motivated me to create Long Property Commercial in the first place, that many of our clients had reached a stage where commercial finance was increasingly relevant.
The investment landscape has changed
The second reason is broader.
The federal budget in May announced significant changes to the taxation of residential investment properties, including changes to negative gearing and capital gains tax concessions.
For many years residential property in Australia enjoyed structural advantages like population growth, limited housing supply and attractive tax settings which made it the obvious choice for many investors.
These advantages haven’t disappeared and Australia still faces meaningful housing shortages and benefits from population growth. Quality residential property may very well continue to perform well over the long term.
However the relative attractiveness of residential investment property in Australia has now shifted.
Notwithstanding the budget changes you can still negatively gear commercial property investments.
When holding costs for residential properties substantially increase (with tax deductions ending next year for negatively geared established properties acquired after budget night), and when capital growth feels less certain now, investors naturally begin asking… “What are the alternatives?”
Furthermore buying investment properties in SMSFs has been a popular strategy for a while but under the new rules you can only borrow for commercial property investments (not residential). This is another reason why demand previously directed towards residential property investment may now be redirected towards commercial.
Commercial property is clearly becoming a more important part of the property/ wealth journey for many clients.
Different assets for different stages of the property journey
One of the most interesting things about working with clients over many years is watching how their property journeys and their investment strategies evolve over time.
The early stages of wealth creation via real estate tend to revolve around residential property. Most people begin by buying their first home to live in. Eventually they might upgrade to a larger property, and eventually they may buy an investment.
Residential assets are generally easier to understand. Banks are comfortable lending against them. Demand is broad. Liquidity is strong. Residential property has historically delivered excellent long-term capital growth too.
But as clients mature, and portfolios grow, priorities change… Once clients have accumulated meaningful equity (either through capital growth, success in their professional lives, increasingly via inheritance), they’re no longer focused solely on capital appreciation. Income starts to matter much more.
Some clients want stronger cash flow to support lifestyle choices. Others want additional income to offset holding costs elsewhere in their portfolio. Business owners may want to purchase the premises from which they operate.
Some clients start thinking much further ahead towards retirement and consider assets more orientated towards meaningful passive income. And so this is where commercial property enters the conversation…
Commercial assets have traditionally offered higher rental yields than residential property which can improve cash flow. Longer lease terms can also provide greater income certainty, while annual rent reviews and structured rental increases may offer protection against inflation.
I don’t see commercial property investment replacing residential, however I do see commercial becoming increasingly important for clients as they mature, and many Long Property clients are approaching this stage now.
Experiencing it personally
The final reason for my growing enthusiasm towards commercial is a personal one.
Last year Elise and I purchased our own first commercial property, and I’m pleased to say it has been a positive experience.
Owning a commercial property has given me a greater appreciation for the asset class, not simply from a financial perspective, but also from the perspective of being a real owner navigating commercial leases and commercial lending structures and the like.
This is over and above playing my part in our Long Property Commercial business.
So when clients ask questions about commercial property now I’m no longer speaking purely from a theoretical perspective.
My personal experience has given me greater confidence in helping clients evaluate whether the commercial property asset class is right for them.
Looking ahead
Residential real estate will likely continue to be the logical starting point for most people.
However commercial property deserves a place in more strategy conversations now, and as a business we will remain focused here, ultimately to ensure all our clients are supported in the best possible way.
As strategic advisers we should be able to support our clients with where they are today, while keeping an eye on where they’re trying to get to in the future too.
Thanks as always for reading.
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This article provides general information only and has been prepared without taking into account your objectives, financial situation or needs. We recommend that you consider whether it is appropriate for your circumstances and your full financial situation will need to be reviewed prior to acceptance of any offer or product. Nothing on the Long Property website constitutes legal, tax or financial advice and you should always seek professional advice in relation to your individual circumstances.
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