Читать книгу Australian Residential Property Development for Investors - Forlee Ron - Страница 10

Before you decide to embark on a career in property development, it is important to a gain a good understanding of the difference between residential and commercial property development. Residential is a lot easier to understand and to start out with, while commercial requires more experience and is associated with greater returns and higher risks.

The key difference between residential and commercial developments is the assessment of their value as an asset in dollar terms. With residential, the value is based mainly on supply and demand, whereas the value of commercial properties is based on the income stream or annual rent of the property known as the ‘annual yield' from the property. This means that no matter how architecturally attractive the commercial building may be or how much it cost to build, its value will ultimately depend on the leases and the net income stream the building produces. Other differences between these assets are described later and summarised in table 1.1.

Table 1.1 : residential versus commercial developments

Research

In analysing the property market for a potential development, one would need to undertake more intensive market research with commercial property than with residential. While residential supply and demand is localised, the demand for commercial properties is based on a macro or regional area as commercial properties require greater market audience to make a development viable.

Long-term values

The long-term value of any property, whether residential or commercial, is subject to a range of variables, which can include neighbourhood characteristics, demographic shifts, level of development activity, community facilities, schools, transport services and the status of the local economy. A well-selected residential property in the right location allows for the most effective management and control of these variables. By contrast, commercial property can depreciate as a result of a single unforeseen event, such as the closure of a road or construction of new outlets close by. Commercial property can also benefit from a monopoly, however, especially if there is no further development that would create competition.

Value adding

Developers in residential property can potentially add value to their properties, for example by constructing a second storey or garage or by renovating the kitchen or bathroom. On the other hand, with commercial properties these opportunities are relatively limited even in prime locations, where the established street frontages and local government regulations can prohibit large-scale renovation works. On the positive side, the owner of commercial property can improve the returns and capital value of their building by undertaking a cosmetic makeover to improve the look of building or by changing the lease to offer more favourable terms.

Rental growth

Although rental growth will vary according to location, commercial property offers greater opportunities for growth when compared with residential. Rental yields, which are based on supply and demand for accommodation, are generally lower in residential properties than in commercial. Annual rental increases on commercial leases are generally in line with the consumer price index (CPI) or 4 per cent, whichever is the greater. This is not always achievable with residential property. Commercial property leases tend to be much longer as well – from three to twenty years – and are quite often secured by bank guarantees, which make them a secure investment.

Market size

Depending on its location, a residential development can cater for a broader market than a commercial property. It is also easier to market and sell a residential development, such as an apartment block, as it can be broken down into smaller units that can be divided into strata sections and sold to a number of purchasers. A commercial building with similar floor area, such as small office block or shopping centre, would look to a single purchaser.

Initial investment

Based on the scale of the development, most residential projects require a smaller amount of capital to get started. In addition, lending institutions have the infrastructure and systems to make it easier for the consumer to apply for a home loan. With more banks and new mortgage companies entering the market, finance for a home is a lot easier to secure than for a commercial development. As commercial developments require larger capital, the application for funding is more complex and takes longer to gain approval.

Liquidity

With residential finance more readily available for end-purchasers, housing developments are a lot easier to sell than commercial developments. This allows residential developers to exit their development earlier. In addition, there are generally not as many conditions attached to the purchase of a residential property, making settlement and the sales procedure a lot quicker. With commercial developments, finding an end-buyer can be complicated as these buyers, being more sophisticated, will impose more stringent conditions. A commercial project will also generally take longer to construct, thereby incurring more interest.

Purchasers

Purchasers of residential property are not as sophisticated as seasoned investors interested in commercial properties. Commercial property investors will generally negotiate strongly on a number of issues thereby delaying the settlement, which in turns affects the developer's profit. A residential property generally is sold based on a standard offer and acceptance executed by a real estate agent, whereas for larger commercial properties a solicitor is required to formalise the purchase.

Capital growth

During the boom period of a property cycle, residential properties have a far greater capital growth than commercial. A shortage of residential properties on the market will drive prices up, whereas the value of commercial properties is tied to the term of a lease with only a CPI-related increase in value. However, most commercial properties have a rent review over an agreed period to make up the loss of capital growth during the boom period.

Leasing

Commercial properties can be harder to lease owing to the specific requirements of commercial tenants. In some instances, owners who are pressed to find a commercial tenant will offer generous lease terms to make sure the property is not vacant. These terms can take the form of rent-free periods or heavy expenditure to meet the tenant's specific needs. They could also delay a project as a certain percentage of leases could be a precondition for construction finance. With residential, the developer has the flexibility to sell part of the development to individual purchasers and rent out the balance – if, of course, the residential developer has selected to develop in a location where there is good infrastructure.

From the foregoing assessment it may seem that commercial properties involve greater risks. In general this is true, but for the knowledgeable and experienced there are greater profits to be made for the same investment of time and personal engagement in the commercial sector than in residential developments. Remember, the higher the risk the more profitable the investment.