Commercial property yields are doing a lot of work in the current pitch to investors. With borrowing costs at a 15-year high, a sponsored piece from the founder of a commercial property agency argues that well-selected commercial assets can absorb higher rates, while residential investors wear mounting cash-flow pressure. There is something to that. But it is a sales view, and it leaves out the parts that decide whether an investor actually comes out ahead.
General info, not financial advice applies throughout, and so does a caveat on sourcing: this article works from the public summary of that pitch, not the full text, so we test the logic rather than any specific figures.
Why commercial property yields look better on paper
The basic argument is simple. Commercial assets typically start from a higher gross yield than houses or apartments. Residential yields in many capital cities have sat in a low range for years, while commercial categories such as industrial, neighbourhood retail and medical suites have often priced above that. When the cash rate rises, a higher starting yield means a smaller gap between rent and interest.
That is the whole case. Cheaper money is gone, so you want a bigger income cushion.
Key numbers
- Compare the asset’s net yield (after outgoings) to your actual loan rate, not the advertised gross yield.
- Ask for the lease expiry profile, not just the current rent.
- Check the vacancy history for that specific precinct, using independent data such as CoreLogic, PropTrack or the agent-neutral reports of major valuers.
Net leases: what they shift and what they do not
Under a net lease, the tenant pays most or all of the outgoings, including council rates, land tax in many cases, insurance and sometimes maintenance. The landlord’s income is cleaner and more predictable, because the costs that can eat into a residential rent mostly do not land on the owner.
That is a real advantage when interest costs are climbing. Fewer surprise bills means a tighter forecast.
But a net lease moves expense risk, not tenant risk. If the tenant leaves or fails, the landlord is back to carrying the loan with no income and, now, the outgoings too. Residential investors rarely face a 12-month void on a single tenancy. Commercial investors sometimes do.
The catch: vacancy and the long void
Here is the catch. Commercial leases are longer, which is a strength while they run. Three-to-ten-year terms smooth income. But when a lease ends, re-letting a specialised space can take months, and incentives such as rent-free periods or fit-out contributions can claw back a chunk of the headline yield.
What to pressure-test before buying:
- Tenant covenant. Who stands behind the lease, a listed company, a franchise operator or a sole trader?
- Lease length remaining. A 10-year lease with eight years to run is a different asset from one with 14 months left.
- Re-letting evidence. How long did similar spaces in that area sit vacant recently?
- Make-good and incentive costs. These rarely appear in the sales brochure.
Valuations move with rates too
Commercial assets are valued largely on yield. When bond yields and rates rise, buyers demand higher yields, and that pushes values down, all else equal. So a stronger yield today does not guarantee the capital value holds. An investor who buys at a tight yield now and faces a higher required yield at the next valuation can see equity erode even if rent is paid on time.
This matters for lending too. Banks often value commercial property conservatively and lend lower loan-to-value ratios than for residential, so the deposit required is typically larger. A bigger cheque up front changes the return maths.
Is residential really in worse shape?
The contrast with residential has some basis. Many residential investors bought at low yields, borrowed heavily, and now carry loans where rent covers only a portion of interest. Negative cash flow is real for a lot of them. Our look at negative equity Australia faces as another rate rise nears covers how thin buffers turn into forced decisions when prices soften.
But the comparison is not apples to apples. Residential has deeper buyer demand, easier finance and an owner-occupier exit. Commercial has a narrower pool of buyers, so selling in a hurry can cost more. Lower liquidity is part of what the higher yield is paying you for.
What this means for readers
The pitch is not wrong, but it is incomplete. A higher yield and a net lease can help a carefully chosen commercial asset carry its debt. They do not remove vacancy risk, valuation risk or the cost of a bigger deposit and a thinner resale market.
A sound rule of thumb: stress-test any commercial purchase at a loan rate one to two percentage points above today’s, with a six-to-twelve-month vacancy assumption, and see whether you can still hold it. If the numbers only work in the best case, they do not work.
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General info, not financial advice.
