Commercial Property News

Read the latest Commercial Property News items for your interest

Depreciation: How it works for commercial property

You may be aware of the benefits of Tax Deprecation can have on an investors cash flow. Did you know that ATO statistics still show less than 40% of property investors take advantage of these allowances?
All income producing properties such as rental property are entitled to Tax Depreciation allowances no matter what year they were built. The purpose of Tax Depreciation is to compensate tax payers who incur capital expenditure on depreciating assets (such as carpets, blinds) for the decline in value of those assets over their effective life.
Are you thinking seriously about investing in property but are torn between going commercial over residential?
Commercial properties have generated lucrative incomes for many investors, so it’s definitely worth considering for your investment portfolio. And here are some of the reasons why.
1. You can claim depreciation while using your commercial property
Leasing a commercial property you have purchased using your self-managed super fund is a strategy that works. In this case, the super fund or the individual taxpayer can legally claim the commercial property’s depreciation allowances, which benefits their commercial property investment. How is this possible? Well, the ATO doesn’t regard your commercial property as your principal place of residence even if you use it.
2. Older commercial buildings get their share of allowances too!
Building Allowance can be explained as the drop in value of the materials that make up your property’s structure. This includes bricks, concrete and the like. In older commercial properties, the construction date makes or breaks the deal. You can claim building allowances if the following conditions are met:
Construction began from:
20 July 1982 – 21 August 1984: you are entitled to depreciate 2.5% of the construction cost.
22 August 1984 – 15 Sept 1987: you can depreciate 4% of the construction cost.
16 Sept 1987 onwards:  you can depreciate 2.5% of the construction cost.
3. Effective life and industry classification are 2 main factors to consider
Yearly, the Tax Commissioner issues a list of the items property owners can and can’t claim. This list, however, doesn’t apply to commercial property investors who can claim some items at different rates compared with residential claim rates. As an example, in a commercial property, carpets can be claimed over eight years while claiming the same item in a residential property takes 10 years. That’s because carpets in commercial properties tend to experience more wear and tear.
The ATO has also determined a number of industry specific items for depreciation claims. For instance, a restaurant owner can claim items used specifically in the restaurant and food service industry.
Additional tips on saving taxes with commercial properties
Quality determines the depreciation allowances. High-quality commercial properties have higher depreciation allowances.
Building height is a huge factor in determining how much the depreciation allowance should be. This is because taller structures tend to include more services like lifts, fire services etc, which translates to a higher value.
In cases where the actual construction costs cannot be determined, a qualified quantity surveyor must do the estimation.
Use a property deprecation calculator to compare depreciation benefits when considering residential versus commercial investment properties.
Don’t exchange on a property before reviewing the capital expenditure forecast and the contract of sale. This will help ensure you maximise all available tax depreciation benefits.


How to keep tenants in your commercial building

Finding the right tenants and keeping them for the long term is the goal of most commercial property landlords.  But how do you do this, especially in tough market conditions?
The name of the game in tough markets is to keep your tenants and maintain your cash flow as a result, and to do this, communication is the fundamental thing.
If you only have one tenant, it is important to understand how they are going, have they got a good flow of business coming in?
A sophisticated landlord will try to understand the market the tenant works in. If the tenant is a fencing contractor for example, a slowing residential property market may drastically impact them.
In talking to the tenant about what kind of work they do, a landlord may well discover the tenant has a number of ways to work around and through tough markets. If your tenant has a problem then ultimately so do you.
By talking to the tenant every couple of months and establishing a rapport, a landlord can bring up the idea of an exit strategy.
Exit strategies are a way of allowing the tenant to leave the property while you release the tenancy.  In this way the landlord has the opportunity to minimize vacancies. It may be that a repayment program or a rental abatement is part of the exit strategy.  Reducing rents may lower the threshold of pain for a tenant but usually it is not the rent that is the issue rather than the lack of income.
If you only have one tenant, it is important to understand how they are going.
It is good for landlords to think strategically and long-term when leasing a property.  Leasing to tenants at high levels in good markets is often the goal for landlords and agents alike.  In rising markets this does make sense but perhaps consideration should also be given to the cost of rent as a percentage of the tenant’s income or, put another way, what level of rent a tenant’s business can sustain, especially if the market they work in comes under pressure.
We often hear landlords complain of increasing vacancy levels as the economy tightens and slows.
Landlords that keep their tenants in these times do so because they asked for good sustainable rentals.  These properties are viewed as being stronger in the market and can reflect a higher capital value.
There are no absolute ways of guaranteeing you will keep a tenant. But if they are making money with you, and you with them, it’s a pretty good arrangement.

How to choose the right commercial property

There are many things to consider when buying a commercial property and two of them are crucial to the future performance of your investment.
The first is the property itself, including land and improvements (buildings), and the second is the lease or business component.

It’s important to investigate and analyse the pros and cons of each component and how it measures against your overall investment strategy.
If you’re investing for capital growth, certain commercial, industrial or retail properties – such as A-grade office space – may prove the superior option. Remember, not all property types perform the same. 
When analysing the potential of the physical property, position and location are often at the forefront of the decision-making process. That’s because with property, asset capital growth occurs from an increase in the value of land, with location influencing the supply and demand for land, which in turn determines value.
For example, land in and around a capital city’s CBD is typically more valuable than land on a city’s fringe. That’s because there is less land and greater demand in the CBD, which drives capital growth.
If you’re investing for capital growth, certain commercial, industrial or retail properties may prove the superior option.  Conversely, while land value increases, the value of improvements or buildings depreciates over time. Therefore, the appreciation in land must be sufficient to not only counter the depreciation in the value of buildings but also to grow the overall value of the asset in the long-term.
While this is the general rule for property overall, commercial, industrial and retail property is more complex because of the importance of position.
Position refers to ease of accessibility and whether the property’s location is suited to the type of business that would operate from the premises.
A large distribution centre that receives regular shipping and dispatches is likely to require significant space and unhindered road access, and therefore may be better suited to the city’s fringe, near a port or close to major arterial roads.
Regardless of whether you’re buying for capital growth or rent return, your leasing strategy is significantly important to overall asset performance.  It’s important that a leasing strategy allows for regular rental reviews to remain both competitive and viable, and includes provisions for property maintenance and fitouts to ensure improvements are kept to a suitable standard.
Questions to consider when forming or reviewing a lease may include:
  • Do I, the landlord, own the fit-out?
  • Does the asset offer opportunities for depreciation? How will this impact long-term asset performance?
  • Are the tenant’s “make good” obligations sufficient to ensure the property is left in a suitable condition and state of repair when the tenant leaves the premises?
If you’re investing in commercial property primarily for rental income and cash flow, then higher yield properties may be a more suitable way to realise your investment goals.  However, it’s no secret that when it comes to growing wealth through property it’s capital growth that’s the key, not a high rent return.
Whatever your investment goals, it’s important to select a property that matches your long-term investment strategy.
If in doubt, ensure you consult your accountant, financial planner and a property specialist, such as a buyer’s advocate or property manager, before you sign on the dotted line.