Chris Kombi is a director at Fitzroys. He has over 25 years’ experience in the real estate industry, and specialises in the sale of commercial property within Melbourne’s inner and outer suburbs, across a range of asset classes including retail, office, industrial and development sites. Chris represents a variety of property participants from private local investors and developers to high net worth families, government bodies and major corporations and institutions.
Freehold commercial property versus strata commercial property. For self-managed super fund investors and retirees, the answer is becoming clearer.
Over the past two years, the popularity of strata property has surged. This demand has been led by passive investors such as retirees wanting to buy a property that will immediately improve their income, or SMSF investors in their 50s preparing for their retirement. Looking to maximise their rental returns, they have recognised that strata properties typically offer higher yields, as well as a number of tax benefits.
These yield-chasing buyers, concerned with heightened land tax obligations, have weighed up the merits of owning low-yielding freehold property over the slow burn of capital growth where the underlying land value of that freehold asset will continue to appreciate.
Looking purely at net yields and putting the potential of capital growth to one side, the average 5.5% net return from a commercial strata-titled investment is compelling when compared to an average net return of 3.5% from a freehold property and 1% return from bank interest.
For retirees and SMSF investors, the equation of immediate income and improved lifestyle is a simple calculation. For instance, in dollar terms, a $1 million dollar investment will return an annual income of $55,000 from a strata retail property, $35,000 from a retail freehold and $10,000 from equivalent funds in a savings account.
A further attraction of strata property for older buyers is that they are generally newer properties in need of little capex and are easier to manage with an owners corporation overseeing maintenance - creating an ideal set-and-forget investment. The fact that the land value is washed through the entire development also presents a very low land tax liability that does not cut into the rental return.
Strata-titled assets offered to the market have come at a range of price points. Fitzroys has sold assets from $500,000 to over $5 million over the past 12 months - offering buyers broad accessibility to this sector of the market.
Case Study: Aurora Village, Epping
By way of example of the strength of the strata market, post-July, during the COVID period, Fitzroys has sold nine strata-titled retail properties within the Lendlease master planned Aurora Village in Epping, within Melbourne’s northern growth corridor, for a combined $8 million. Six of the sales occurred without inspections during Melbourne’s Stage 4 restrictions.
Not surprisingly, seven of the nine properties were sold to SMSF investors or retirees.
Each has a long, secure lease in place with fixed annual rental increases. They sold to separate investors at an average yield of 5.4%, with minimum five-year leases plus options, and rents ranging from $33,000 to $58,000 per annum.
Nearly all of the properties sold were leased to tenants that had continued to operate throughout the COVID period, again underscoring the security and defensive nature of these assets. Tenants included Bottlemart, a pizza restaurant, Mediterranean eatery, butcher, bakehouse, grocery, and laundromat, while a hair salon also sold.
We received more than 220 enquires for these shops from buyers all across Australia and abroad. One shop sold to an investor from Hong Kong.
As well as the typical benefits offered by strata-titled property, these are recently-constructed properties that also offered strong tax depreciation benefits.
Naturally good strata assets require strong fundamentals. In the case of Aurora Village the properties were well-located within an area that offered future growth prospects - expected to be home to 25,000 residents and forming a core part of Melbourne’s northern suburbs growth story. Furthermore, the Aurora Village town centre is anchored by Coles and Aldi supermarkets and other key medical, health and lifestyle tenants.
We have also recently sold strata-titled retail properties in Melbourne’s south-east suburban growth corridor, and in inner-north locations such as Carlton and Northcote that are benefiting from medium and high-density development. Those fundamentals won’t change.
