Commercial Property Investment Returns
DIFFERING REGIONAL PROPERTY RETURNS When comparing commercial property investment returns, it is important to look at all the factors that impact on your net return. For example a new commercial property will have higher depreciation tax deductions than older property. Also if you are borrowing at 8% and earning 10% net this will have a big bearing on your financial gain, notwithstanding that you will be paying interest. Therefore the initial yield on the total project may be misleading when comparing properties if you do not take the above factors into account i.e. “after tax/after loans.” It is nigh impossible to do this comparison calculation accurately without the aid of feasibility software. Commercial property investment returns vary along the eastern states. The most common returns quoted with smaller investments are net rentals expressed as a % of purchase price which are referred to as Capitalisation Rates or “Cap Rates”. As pointed out above, whilst they are a good valuation tool they do not reflect what happens in your bank account. Lower yields often reflect the market view that buyers are prepared to sacrifice immediate returns for long term capital growth, or security of tenant. Component analysis is discussed on this site under the “Property Investment Steps” button above, (See Step 2) under the sub heading “Components of Financial Gain”. The total financial gain can only be quantified by a feasibility study. Larger Commercial Properties Investments in these commercial centres are typically through listed or unlisted Property Trusts via stapled securities. This form of research is outside the realm of this site, except to demonstrate an important investment appraisal technique. If you look on any of these web sites you will see reference to two valuation techniques explained in the glossary. The primary method is the discounted cashflow assuming an exit price in 10 years adopting the capitalisation of net returns process. Sites such as those below demonstrate this.
The discounted cashflow method of appraisal consists of determining the present value by applying a discount rate over a 10 year cash flow period. This Internal Rate of Return (I.R.R.) will give you an idea of the returns that can be expected from these investments, which are distributed to investors after the deductions of borrowing interest, fees etc. This required rate of return (IRR) by the investor can be applied to any income projection to determine the value to that investor. Alternatively it can be used to determine market value, if it has been derived from comparable sales analysis completed on this basis. This approach more accurately assesses the impacts of all known future variable factors.
All preparatory information on Commercial Property Investment is contained within the
"RESEARCH STEPS"
section.
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