Retirement strategy – 5 reasons retirees choose commercial property investment

Commercial Property DD Tips Part 2
Key Due Diligence Tips for Buying Commercial Property (Pt 2)
March 5, 2019

Retirement strategy – 5 reasons retirees choose commercial property investment

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A prosperous retirement looks different for everyone, but almost all nearing their twilight years aim for one thing: financial security. Which is why commercial property investment could be a great tool for your retirement arsenal.

To feel secure, smart retirement strategies should tick a few boxes:

  • Positive cash flows
  • Capital growth
  • Tax effective features
  • Achieving the above with peace of mind

Commercial property investment can check these off for retirees – and much more.

Here are five reasons retirees are choosing commercial property investment for their retirement strategy.

1.     High (Positive) cash flow

Cash might be king, but it’s cash flow that will keep you on your retirement throne. An investment with high yields can be crucial for a comfortable retirement because it generally provides stable and positive cash flows for you to live off.

Commercial property typically delivers higher yields than other investments, with net annual returns anywhere from 5.5 to 8 per cent, and even higher if the asset is purchased and managed well. Meanwhile, residential property net annual returns are around 1 to 3.5 per cent per year, and dividends from shares can often fluctuate (because of the volatile nature of the stock market).

Higher yields will also outrun inflation, and we are trying to hedge against inflation. So, if you’re planning to live off your investments in retirement, commercial property will give you comfort that a 2 to 3-per cent annual inflation rate won’t catch up to your 6 per cent (or higher) annual return. Diversification, strong underlying value, risk minimisation and low gearing are all useful strategies to assist in pursuit of this goal.

2.     A tax effective retirement strategy

If you’ve already retired, you’ve paid your fair share of tax after years in the workforce. So, it seems unfair for you to keep paying so much of it after getting your gold watch. That’s another reason commercial property fits well in a retirement strategy, there are plenty of tax benefits.

The building and fittings in your commercial property will decrease in value over time, and this deterioration can be used to reduce the taxable income from the property. Annual depreciation amounts on a commercial property can often be anywhere from 20 to even 50 per cent of the property’s income, especially if the property is not very old. So, you can see why many consider finding depreciable items another value-add opportunity.

Expenses on the property can be used to reduce your Capital Gains Tax, which is the tax payable on the profit from buying and selling a property. As we’ll discuss, there are smart expenses to be made on a property to improve its value. These costs (along with the purchase price) are deducted from the property sale price and reduces the taxable amount on your capital gain when the asset is sold.

3.     Stability of income

Commercial property investment won’t just provide you with high yields, but stable income too. This is because of your tenant.

Thanks to long lease terms and ironclad lease agreements, you’ll have a much easier time understanding how many holidays and golf trips you can go on each year. Tenants might also be inclined to stay longer if they’ve invested capital to fit out or customise the premises.

Lease terms generally run for multiple years, meaning you’ll have a certain level of income guarantee until the lease expires. Generally, rental payments will increase at a fixed percentage or in line with the Consumer Price Index (or CPI – the measure of price changes of goods and services in Australia). This means your yields will not only float with the tide, but swim toward growth through increased rent which ultimately flows through to higher underlying land values.

Commercial property is a lot less liquid than an investment like shares. This is a good thing for retirees who aren’t interested in high risk investments, because liquidity generally pays the price of volatility. A company’s value might rise and fall overnight because shareholders can trade shares almost instantly. For real estate to have the same volatility, a property would need to be auctioned every day.

4.     Grow your wealth (don’t just spend it)

Maybe your retirement involves creating lasting wealth for your kids and grandkids, while still holding onto your own quality lifestyle. One way to achieve this is by growing your investment. While the long term returns on commercial and residential property historically are similar, a far greater proportion of commercial returns are due to income rather than capital growth.

A strength of commercial property in your retirement strategy over most other investments, is there are so many ways to add value. For example, new signage will improve the property’s exposure to passing cars and increase its desirability for tenants. This can boost demand for your property, and with it the property value.

You can even upgrade the tenants themselves. If a lease is up for expiry, it might be an opportunity to replace the tenant, perhaps with a national or multi-national operator, or make structural or cosmetic upgrades to achieve better rents. and ultimately improve or ‘manufacture an uplift’ in the capital value of the asset.

5.     Peace of mind

If negotiating with tenants and making property improvements sounds like a lot of work, you can invest your money with experts to do it for you.

Direct commercial property investment and commercial property syndicates have become very popular for retirees in Australia, particularly those without the time or experience to invest on their own. Performance Property Advisory help sophisticated investor’s buy direct commercial assets as well as provide syndications for those that may not have the funds to access higher value assets. Syndicators pool investor funds together so you can access investments of a much higher value bracket than you might otherwise be able to afford on your own. The team at Performance Property Advisory perform lengthy pre-purchase investigations on the property, known as due diligence (some basic tips can be found here in Part 1 and Part 2), and can professionally manage your investment right up until after it’s sold.

Syndicators also have a huge network of professionals, including valuers, leasing agents and bankers, which will become an inherited advantage for you.

Commercial property investment can be a smart retirement strategy, no matter what your retirement looks like. Considering a cooling residential market (Melbourne and Sydney) and the low net annual returns, the strong (and in many cases strengthening) performance of commercial property in recent years, sound economic conditions overall and historically low interest rates (expected to remain low in the medium term), the outlook for commercial real estate is positive.

For the best advice regarding commercial property investment for your retirement income, get in touch with Heath Bedford at Performance Property Advisory on (03) 8539 0300 or heath@performanceproperty.com.au