In Australia, no other asset class generates as much excitement, media coverage or debate as the property market. This article, in collaboration with Performance Property Advisory, will explore the different property types and key factors you should consider when thinking about property investment.
Residential Investment Property
Historically, the ‘Great Australian Dream’ was to own a freestanding house on a quarter acre (1,000 sqm) block. But times have changed and the needs of homeowners have grown so apartments, units, villas and townhouses have become popular long-term housing options.
Residential property is arguably the most unique asset across all classes. It can be viewed (and owned) as a place of shelter or a forever family home (owner-occupier market). However, that same property can also be a long-term rental property, rented to tenants with minimal emotional involvement from the owner (investor market). The difference in opinion makes the value of the property difficult to measure.
When that same property goes up for sale, an investor may determine the value by looking at comparable sales in the area, while an owner-occupier might value it based on subjective factors. Usually, the owner-occupier has been waiting years for a property to come up for sale on this particular street (because it’s within walking distance to their kids’ primary school). Or perhaps the architectural style is unique or it’s a scarce federation character home built in the 1920s in good condition. These subjective factors are difficult to quantify and therefore the owner-occupier often dictates market value over the investor.
Investing in residential property is popular given people will always need a place to live, and therefore this keeps demand high. Owner-occupiers typically make up between 70-80% of property owners, leaving investors owning between 20-30%, making up the rental property supply.
When compared to the commercial property market, the residential market typically has higher capital growth and lower rental yields. This is because residential properties have a higher volume of demand (personal utility) and a higher land-to-building ratio.
Factors affecting residential properties
Performance Property Advisory has identified and continues to track 5 key indicators that affect the residential property market on a location-specific basis:
- Affordability index. This refers to measuring average mortgage repayments as a percentage of the average mortgage.
- Levels of lending activity to owner occupiers and investors.
- Number of properties available on the market to purchase (stock on market) and how long it takes for them to sell.
- Rental vacancy rate, also known as availability of rental properties, and its relationship to the median rent.
- Job creation index. This refers to how many job vacancies are there to encourage migration and new demand entering the market.
When it comes to property type (unit, apartment, villa, townhouse or freestanding house), units typically return a higher rental yield but may underperform freestanding houses in capital growth as the latter has more land.
The general rule of thumb is that land appreciates in value over time, and buildings depreciate. This is of course subject to exceptions, for example architecturally unique homes or older character homes.
Commercial Investment Property
Commercial property is the catch-all category for any form of property that is utilised by businesses, and not used predominantly as a residential dwelling.
Types of commercial properties
The main types of commercial properties are:
Where businesses conduct their day-to-day operations. Office spaces can range from small, single-room spaces to large multi-story buildings.
Businesses that sell goods and services directly to customers. This can include anything from small shops and boutiques to large department stores and shopping centres.
Businesses that require space for manufacturing, warehousing or distribution operations. Industrial spaces can range from small workshops to large factories and distribution centres.
Businesses that provide accommodation, food, and beverage services to customers. This can include hotels, motels, restaurants, cafes and bars
Businesses that provide healthcare services, such as medical clinics, dental clinics, and hospitals.
Special purpose property
Specific purpose facilities such as schools, universities, childcare centres, and other community facilities
Factors affecting commercial properties
Investing in commercial property is becoming increasingly popular, as businesses prefer to own their premises for greater control and flexibility. More business owners are utilising their Self-Managed Superannuation Fund (SMSF) to purchase their property. It’s important to speak to a financial planner or SMSF specialist before get considering this as there are many rules and regulations.
Commercial property can also be accessed as an investment by individuals through purchasing units in REITs (Real Estate Investment Trusts) or ETFs (Exchange Traded Funds) which is similar to owning a share of a listed company such as BHP or Commonwealth Bank. Many of the major shopping centres and large office buildings are owned by REITs or ETFs.
One downfall of investing in commercial real estate is higher values making it more costly than residential, leaving many investors unable to participate in this market.
So, what type of property should I invest in?
There is no black-and-white answer to what the best type of property investment is (or any investment for that matter). There should only be risk-considered options tailored to your personal circumstances by qualified professionals. Find the most updated research report for the Western Australian property market here.
About Performance Property Advisory
- Buyer’s Agent/Qualified Investment Property Advisor
- Conveyancer/Settlement Agent
- Finance Broker
- Finance Planner
For more information about our extensive property research program across Australia, or for direct assistance in purchasing your next home or residential or commercial investment property, contact Lachlan Delahunty, Associate Director and Property Advisor in Perth, for a free initial consultation or portfolio review.
About Carbon Group
At Carbon, we are dedicated to helping you through your investment property journey. Our accountants, finance brokers and financial planners are at your disposal and are here to offer their expertise so that you can make informed decisions about your investments.