Understanding yields is crucial for a successful commercial property investment. To find out more about why yields are so important and the current market pressures affecting them, we sat down with Northern Region Director, Anthony Carbone…

Investors are driven primarily by ROIs, especially in today’s market. Property is cyclical, so although some areas of the country may be experiencing a cooling market, there are still profits to be made here in Melbourne. 

High returns on capital are what many clients say that they’re after – over the years this hasn’t changed. There is no doubt that understanding and strategising for optimal yields are a fundamental aspect of a successful commercial property portfolio, but it is important to recognise that they aren’t the be all and end all.

Competition in commercial property is rising. 

While interest rates are low, returns in Australia have plateaued in recent years. Retirees using interest gained on money sitting in banks to fund their day-to-day lives can expect a return of around 2 to 2.5% in interest, before tax. This is significantly less than previous years, especially for baby boomers, which means other avenues of  generating capital are increasingly being explored – one of which is commercial property.

The increased investor interest and competition in commercial property is naturally placing an added pressure on the Australian market – this is a key challenge in the industry today that we have recognised. 

As a result, average commercial property yields are currently around 3 to 4%. The high demand from investors is a key driver here, but remember, the property market is constantly shifting. External forces play a major part in how the market fares and we could be in a different position by the end of the year.

The cyclical nature of property means there is never really a ‘bad time’ to invest, only shorter and longer-term strategies in play. Capital growth can be expected from property investment, irrespective of market forces and changing pressures.

For investors, there can be a danger in chasing yields. Understanding the market and local area is vital and often our clients are attracted to country properties for the higher prospective returns, but in the long term this isn’t always the best strategy. 

If that country property becomes vacant it can be a lengthy process to find another tenant and loss of earnings can be an issue. We recommend investors get to know the market they are buying in and rely on trusted advisers to help. Taking a look at similar properties and how they have fared in recent years, as well as market forecasts, are a good starting point.

While chasing yields can be exciting, our tip is to focus on the fundamentals. 

Investors that resist being distracted by short-term returns and take the time to understand what and where they are buying will build sustainable wealth. 

For more details or to speak with one of our consultants, please contact our head office: 03 9654 2311.    

Anthony Carbone
Northern Region Director