How to Invest in Commercial Property in Australia

Commercial property operates under fundamentally different rules to residential investment. Understanding those differences is the starting point for any investor considering this asset class.

• Gross yield is higher - typically 4–8% vs 2–4% residential - but net yield depends heavily on vacancy periods between tenants
• Leases run 3–10 years with options, compared to residential 6–12-month rolling terms - this creates income certainty when tenanted
• Tenant pays outgoings (rates, insurance, maintenance) under most commercial leases - landlords receive gross rent and pay very little on top
• Vacancy periods are longer and more damaging - a commercial property can sit empty for 6–18 months between tenants, especially in secondary locations
• Property management is more specialised - commercial agents charge 5–10% of gross rent vs 7–10% for residential, but the skill set required is different
• Finance is harder to obtain - most lenders cap commercial LVRs at 65–70% and require owner-occupier or national tenant covenants for better rates
• GST applies to commercial property transactions - both the sale price and rent are generally subject to GST unless sold as a going concern

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Commercial property is not one asset class - it spans several sub-categories, each with distinct risk, yield, and tenant profiles.

• Office: CBD and suburban office space. Yields 5–7%. Disrupted by hybrid work - secondary assets face structural vacancy while premium A-grade buildings maintain demand
• Retail: Shops, strip retail, shopping centres. Yields 5–8%. Major retail hit by e-commerce; neighbourhood retail (medical, food, services) more resilient than discretionary
• Industrial and logistics: Warehouses, distribution centres, cold storage. Yields 4–6% and compressed during COVID logistics boom. Strong structural tailwind from e-commerce
• Childcare: Long WALE (weighted average lease expiry), government-subsidised demand. Yields 5–6.5%. Often sold as going concerns with operator-tenant retained
• Petrol stations: Triple-net leases with fuel company tenants (BP, Ampol, Viva). Long leases, high yields (6–8%), but contamination liability and EV transition risk
• Medical and healthcare: Allied health, GP clinics, pathology. Defensive demand profile, staggered expiries, government-backed revenue streams
• Pubs and hospitality: Specialist asset class - valuations based on EBITDA not yield. Requires specific expertise and licensee vetting

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Buying a commercial property directly gives maximum control but requires significant capital and active management. Here is what experienced commercial investors evaluate before purchasing.

• WALE (Weighted Average Lease Expiry): The average remaining lease term across tenants, weighted by income. A WALE of 5+ years is generally preferred for financing and exit liquidity
• Tenant covenant strength: National or listed tenant (Woolworths, Australia Post, Chemist Warehouse) = strong covenant. Single-director SME = weak covenant. Covenant quality determines risk premium
• Rent review mechanism: Fixed increases (3–4% p.a.) provide certainty; CPI reviews track inflation; market reviews reset to market - can go down in soft conditions
• Outgoings structure: Confirm whether lease is gross (tenant pays nothing extra), net (tenant pays some outgoings), or full net (tenant pays all). Read the specific lease, not agent summaries
• Zoning and permitted use: Check council zoning carefully. A property zoned B2 Local Centre permits different uses to B6 Enterprise Corridor - this affects tenanting flexibility
• Capital expenditure requirements: Roof, HVAC, lifts, car park resurfacing. Commercial landlords often bear fit-out incentive costs between tenants - factor into yield calculations
• Comparable sales and capitalisation rates: Value = Net Operating Income ÷ Cap Rate. Understand local cap rate compression or expansion before committing

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One of the most compelling reasons Australian small business owners invest in commercial property through an SMSF is the ability to lease business premises back to themselves - a strategy unavailable to residential investors.

• Business real property exemption: An SMSF can purchase property used wholly and exclusively in a business and lease it to a related party (your own company or trust) at arm's length market rent
• This is one of very few related-party transactions allowed in SMSFs - most other asset dealings with related parties are prohibited investment rules (SIS Act Section 65)
• Rent must be commercial market rate - confirmed by independent valuation. ATO scrutinises below-market rents as a compliance breach
• Tax on rental income inside SMSF is 15% during accumulation phase - drops to 0% once SMSF moves to pension phase
• CGT on sale is 10% after 12 months in accumulation (with 1/3 discount) - 0% in pension phase up to the transfer balance cap
• LRBA (limited recourse borrowing arrangement) can be used to purchase commercial property inside an SMSF with borrowed funds - loan must be held in a separate bare trust, stricter bank requirements apply
• Contribution ceiling applies - you cannot simply tip large sums into an SMSF to fund a commercial purchase. Contributions are subject to concessional ($30,000) and non-concessional ($120,000) annual caps

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Not every investor has the capital for direct commercial property ownership. REITs (Real Estate Investment Trusts) and unlisted property funds offer exposure without the complexity.

• ASX-listed A-REITs: Goodman Group (industrial), Scentre Group (Westfield retail), Charter Hall, Dexus, Stockland. Trade like shares - daily liquidity but price volatility beyond the underlying assets
• A-REIT ETFs: MVA (VanEck Australian REIT ETF), SLF (SPDR S&P/ASX 200 Listed Property Fund) provide diversified exposure across the sector with low fees
• Unlisted property syndicates: Private vehicles managed by operators (Charter Hall, Centuria, Broadstone). Higher target yields (7–10%), limited liquidity windows (typically 5–7-year lock-up), quarterly distributions
• Wholesale vs retail funds: Unlisted funds may be wholesale-only ($500,000 minimum) or retail-accessible (lower minimums but greater fee loads). Check product disclosure statement carefully
• Due diligence on unlisted funds: Review manager track record, independent valuation methodology, gearing levels, fee structures (management, performance, acquisition), and distribution sustainability
• Liquidity risk: In unlisted funds, redemptions may be suspended in market stress. The 2022–2023 office market repricing caught several funds and delayed redemptions - understand this risk before committing

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Commercial property has a different tax profile to residential investment, with GST adding a layer of complexity most residential investors never encounter.

• GST on purchase: If buying a commercial property as a going concern (tenanted, with lease transferring), the sale may be GST-free - both parties must agree in writing and buyer must be registered for GST
• GST on rent: Commercial rent is subject to 10% GST. If registered for GST, you collect GST from tenants and remit to ATO, claiming input tax credits on expenses
• Income tax: Net rental income (after deductions) is included in taxable income. Unlike residential, negative gearing is less common because yields are higher and interest rates matter more at lower LVRs
• Depreciation: Division 40 (plant and equipment) and Division 43 (capital works at 2.5% p.a.) apply as with residential - engage a quantity surveyor for the depreciation schedule
• CGT on sale: 50% CGT discount applies if held more than 12 months personally or in a trust. Companies receive no CGT discount. SMSF 10% effective rate in accumulation, 0% in pension phase
• Small business CGT concessions: If the commercial property is an active asset of a small business (aggregated turnover under $10 million), the 15-year exemption, retirement exemption, and 50% active asset reduction may apply on sale

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