There is a significant difference in the characteristics of commercial property and residential property and investors need to understand this before committing to a portfolio allocation, a property manager has said.
Speaking at the recent Australian Shareholders’ Association National Conference 2019 held in Melbourne, APN Property Group real estate securities chief executive Pete Morrissey said: “What you really get from residential is higher growth. Generally over the past five years it’s been around 4 per cent.
“But it has produced lower yield so you don’t tend to get the income coming through from your residential investment or your residential asset.”
According to Morrissey, this is in complete contrast to the nature of returns generated from investing in commercial property.
“Commercial property over the same five-year period has returned just under 12 per cent, but the income component is much, much higher and that will always be the case,” he said.
“And that’s the difference between commercial and residential. Commercial is more about an income play with a smaller component of capital growth, whereas residential is a flip of that.”
He pointed out the capital growth generated by commercial property is often linked to gross domestic product or consumer price index growth over time, a quality he described as more sustainable and involving a lower level of volatility.
The yield returns commercial property produces fall into line with the duration of the leases tenants sign, as well as the type of tenants that occupy these premises, he said.
“The lease terms can be anything from three to 20 years. The other difference you get is that you are leasing to corporate tenants with great businesses and long-term cash flows with consistent revenue growth, versus residential property with a tenant you may not know a great deal about where under the Residential Tenancy Act the advantages are very skewed towards the tenant,” he said.
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