Investing in commercial real estate is on the increase on every level from mum and dad investors right through to global players. On the international front, CBRE forecasts real estate investment volumes across Australian and New Zealand to lift by 10% this year after foreign investment hit new records during 2021. Over $16 billion was sunk into local office, retail and hotel assets by offshore investors last year led by Singaporeans and then North American investors.
At the other end of the scale, commercial buyer’s agents and auction houses report highest levels of inquiry as first timers swell the ranks of those choosing to invest in the market. There is good reason newcomers are seeking out advice, too, says Tas Costi, founder of dedicated buyer’s agency Costi Cohen. One of the first rules is to recognise that no matter if you have been buying commercial property for years or want to do so for the first time, there are still several hurdles with which market experts can assist, Mr Costi says.
“The first is simply the limited stock on the market,” Mr Costi says. “We solve this problem for investors by providing them access to off market, pre-market, post-market, and price-reduced stock that is exclusively available for our clients.”
Rarely do clients realise, either, how much time is required to first find properties and then investigate their worthiness as a purchase. “We find most investors are time poor,” Mr Costi says. “They lack time to search for properties and conduct the necessary due diligence.”
Without advice, there is a very real danger of paying inflated prices for property particularly via the auction process or Expressions of Interest campaigns, Mr Costi says. “Our relationships with selling agents in conjunction with our due diligence process enables our clients to achieve the best results below market value. Commercial real estate transactions are more complex by nature in comparison to residential home or investment purchases and our buyer’s agents are experts in the area who work meticulously and thoroughly through all the necessary due diligence on the property prior to purchase.
One of the most critical factors of a CRE purchase is understanding the lease. Unlike a residential lease which is fairly straight forward and cover a few pages, a commercial lease can cover dozens of pages filled with clauses and terms.
“Understanding of leases, development site controls, market analysis, and future development potential all have a critical influence when looking to buy a commercial property at the lowest possible price,” says Mr Costi, adding that clients can either engage a buyer’s agent to be introduced to potential property purchases, or simply for advice and representation throughout the negotiation process. “Successfully acquiring commercial property can be delicate and complex,” Mr Costi says. “It requires thorough analysis and support to ensure all elements of the property purchase have been reviewed and carried out properly. Every property and transaction is unique and the approach to each acquisition requires tailoring to suit the needs of all parties involved.”
Buyer’s agents can also help secure the best prices as well as develop strategies for ongoing investors. Mr Costi said his buyer’s agency recently helped an investor purchase a property 30% below what they were willing to pay. “We identified a potential location of interest, re-strategized their client mandate and then secured an above-market yield investment,” he said. “Then we highlighted a clause in the client’s recently acquired investment property’s lease which enabled them to collect additional rental income from the tenant.”
Rethink Investing acquisitions manager Robert Martin says inquiry has been running so high that many of RI’s buyer’s agents are booked out months ahead.
Low interest rates have been a key driver plus the fact commercial properties are offering the highest cash flows of all real estate in Australia, Mr Martin says. The recent tightening of the commercial market has led to yield compression and effectively translated into capital growth.
Mr Martin says that one constant in his industry is the number of complete surprises hit by new investors in commercial property
“In terms of what surprises new clients the most when they look at this market it is a range of factors that reveal to them they simply do not understand commercial,” Mr Martin says.
“This market is an unknown to virtually all of them. There are multiple questions – what is a good lease? What is a good business? They are very basic questions but very relevant and the answers aren’t as widely known as they would be of those questions in the residential market – because the main thing with commercial property are the differences between it and residential.
“In commercial we talk about net returns as opposed to residential’s gross returns. Then people get really excited to discover that in most cases the commercial property tenants pay all the outgoings.”
At the end of the day, a commercial buyer’s agent is there to cover all the unknowns, Mr Martin says. “There are many things I can find out by carrying out due diligence,” he says. “For instance, I can see if a property has a big easement over it or is in a flood zone. A buyer’s agent can review a lease along with a solicitor, and double check all the rates so it matches what we’re showing our seller and buyer.
“Commercial property is a big unknown. You’re always digging up little things. I have always believed that if you’re not sure about any factor involved with a commercial purchase, then it’s best to seek advice.”
Experts in Commercial Real Estate | Australia | Costi Cohen
Rethink Investing | Commercial Property Buyer's Agency Australia