Commercial Property Australia: THE BASICS

Commercial Property in Australia has a range of terms and ideas which can be confusing to a beginner investor. I'll outline several key parts of commercial real estate so that you can start considering if commercial property investment is right for your portfolio.

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Cap Rate Vs Yield - When you're new to commercial property, yield and capitalisation rate is used interchangeably. The yield relates to the individual building (i.e. office, industrial or retail) and the cap rate relates to what the market views are the expected return for the real estate asset.

Due Diligence - This is a period whereby the commercial property buyer confirmes key details about the property. This includes the building, planning, outgoings, land, lease and tenant.

Gross Lease Vs Net Lease - As a commercial property landlord, you're focused on the net return of the property. However, there is a range of different leases which you need to work with to identify the net return.

Outgoings - When you own a property (commercial or residential) there are various holding costs. BUT... in commercial property, the tenant is responsible for a range of these.

Net Lettable Area - this is the area which your commercial tenant is occupying in the building.

WALE or Weighted Average Lease Expiry is used to determine the average length of multi-tenanted properties.

Term - this is used for a few different parts of commercial property.

Fixed vs CPI vs Market Review vs Other Review - as part of a commercial lease, there will be different ways to review the rent.

Make Good comes in to play at the end of a lease when a tenant may be vacating.

Variation vs Extension vs Side Deed change the commercial property's lease agreement in different ways.

Ratchet Clause could be an extra bonus ... OR BAD for a commercial property investor.

Option can be used when buying a commercial property or used to describe the tenants right to further term.

Free Cashflow - is looking at how much money you get in your back pocket as a commercial property investor.

aRoE - if you're looking at REITs or commercial property syndicates it is common to confuse aRoE and yield/cap rate.

IRR - there would be a 1-hour youtube video dedicated to explaining it... so if you're unfamiliar with IRR don't expect to understand it in 2 minutes of me talking about it (sorry in advance).