Key points
  • High-growth commercial properties may be a sound investment option for some self-managed superannuation funds
  • Opting for high-growth commercial property should align with the SMSF's investment strategy and best meet the retirement needs of members
  • High-growth properties need to meet key criteria and may provide a different investment outcome than high-yielding properties

Self-managed superannuation fund (SMSF) investment strategies vary widely. Around 10% of Australia’s SMSFs - up to 67,000 individual funds - currently own commercial property. Many of these may have purchased premises to lease back to their trustees' own businesses, a widely used strategy which is permitted under SMSF rules.

Other SMSFs may seek high-yielding commercial properties in an effort to boost regular income to the fund which can be particularly useful when members reach retirement phase and are drawing regular payments.

But other funds may look to add high-growth commercial property to their investment portfolio with a view to selling the property down the track for a substantial capital gain. Neither strategy is more correct than the other. It is up to each SMSF to determine the best investment strategy to grow wealth and, ultimately, to provide retirement income to its members.

Here are some things to consider when determining whether a high-growth commercial property is the best option for your SMSF.

What is a high-growth commercial property?

A high-growth commercial property is essentially a business premises - such as an industrial warehouse, retail space, or offices - that meets key criteria for achieving future capital growth. This includes being located in a booming economic or population corridor close to infrastructure with the ability to secure and hold ongoing long-term leases. (See below for more key drivers of capital growth).

High capital growth properties can be different to commercial properties that deliver high rental yields although, ideally, some can do both.

Why capital growth matters in commercial property investing?

As with any investment, achieving capital growth increases the net worth of the investment while also building equity in the property if a loan has been taken out to purchase it. This can also boost borrowing capacity to fund future investments.

Securing long-term tenants with leases that contain automatic rent increases (as most commercial leases do) is one way to increase the property’s value, as are value-add upgrades to the building or its facilities.

For self-managed super funds, capital growth assets are vital as they drive long-term wealth accumulation that outpaces inflation and, most importantly, can provide for members' retirement income when the time comes.

Key drivers of commercial property capital growth

Investors should look for commercial properties that tick the following boxes:

  • Strategic position: Location, location, location is always the golden rule of real estate. Prime commercial positions are generally close to transport hubs and routes, major infrastructure, and economic corridors
  • Growing population centres: High capital growth is linked with areas of high population growth, generating higher economic activity and greater demand
  • Scarcity: Find areas where there may be limited supply of zoned commercial/industrial land, restricting future competition
  • High land-to-asset ratio: This is property terminology meaning any spare land capacity can offer capital appreciation through new building, expansion of existing premises, or redevelopment potential
  • Rental demand: Although strongly linked to location, it can also take in sought-after, adaptable premises that can be put to diverse uses, based on a well-maintained site with good access and amenity

      How to identify high-growth commercial properties

      As with any asset purchase, it is essential to do extensive research. This means familiarising yourself with recent data, trends, and expert forecasts.

      Recent commercial property trends

      • Industrial/logistics: Warehouse-style properties have proved successful investments in recent years due to high demand from the growing e-commerce sector. Although rental growth has moderated since post-pandemic peaks, demand for well-located facilities remains high.

      • Convenience-based retail: Neighbourhood mid-sized, supermarket-anchored convenience and services centres have outperformed larger shopping malls in terms of returns and capital growth potential. This is because these types of properties are generally supported by non-discretionary consumer spending and are, therefore, not as susceptible to economic cycles.

      • Office space: In the wake of ongoing post-pandemic work-from-home arrangements, prime, well-located CBD offices are attracting tenants at the expense of secondary-grade buildings which have considerably higher vacancy rates.

      • Alternative housing: Australia’s ongoing housing shortage has seen more investment in build-to-rent, student-style accommodation, or modern boarding house arrangements financed through commercial construction loans.

      • Repurposing: High construction costs are driving some commercial investors towards renovating or restructuring existing properties to be suitable for alternative or more diverse uses.

      What to look for

      • The best location you can afford, near major transport routes, bustling commercial or business centres, or upcoming developments

      • Areas or regions that promise high-growth opportunities, such as growing populations and/or planned major infrastructure spending

      • Sites or facilities where there is limited competition

      • Opportunities linked to gentrification, urban renewal, or redevelopment, attracting new demographics

      • Versatile and functional buildings and layouts that can be adapted for multiple uses or business needs

      High-growth vs high-yield commercial investment properties

      Many investors in commercial property are drawn by the lure of higher yields. Generally, the commercial sector delivers comfortably higher rental yields (around 5-8%) than the residential property sector (3-4%).

      See also : Residential vs commercial property investment: Comparison

      Commercial investors focussed on high yields are likely to be pursuing a different investment strategy than those looking for high-growth investment opportunities. Often, the properties they are chasing will also be quite different.

      Here are some key differences:

      Income

      • High yield properties will typically generate immediate cash flow, offering higher rental income relative to purchase price.

      • High growth commercial properties prioritise longer-term capital appreciation, offering lower income to begin with but the promise of greater increases in future property value.

      Location

      • High yield properties may be found in established industrial zones, perhaps with tenants involved in logistics or manufacturing businesses, or select regional areas.

      • High growth properties are generally found in places where long-term demand will outstrip supply, often in high-growth areas, around capital city hubs, or where competition may be restricted by lack of suitable land or council zoning.

      Risks

      • High yield properties may run the risk of higher tenant vacancy, particularly in smaller markets or regional areas if a major tenant moves on or goes out of business. They may also be more susceptible to downturns in economic cycles.

      • High growth properties may not be regarded as favourably by lenders who generally like to see commercial properties cover their own costs as soon as practicable. Purchasing them may require larger deposits, higher interest rates, and entail more upfront, out-of-pocket costs to own them. Their valuations may also be more susceptible to property market downturns.

      ${thisWidget.smgExpertQouteAuthorName}

      Is high-growth commercial property right for you?

      Whether you’re purchasing as a private investor or as a self-managed superannuation fund, you will first need to ensure whether a high-growth commercial property aligns with your investment strategy and financial position.

      Here are some considerations particular to SMSFs:

      • Sole purpose test: The golden rule of SMSF investing: is a high-growth commercial property the best investment to provide retirement benefits for fund members?

      • Time to retirement: Ideally, members should have some time before retirement for the property to see longer-term capital growth, overcoming any downcycles along the way

      • Cash flow: Purchasing a commercial property through a Limited Recourse Borrowing Arrangement involves extensive upfront costs, including a deposit of 30-40%, legal and loan fees, etc. Some high-growth commercial properties may not initially cover their own expenses. The fund needs to be able to support loan repayments as well as other outgoings.