MUCH has been said about the future of workplaces since COVID-19 forced some major changes to office life as we know it, kicking flexible work practices into gear.
At this stage, no one really knows how offices will look in the future as uncertainty still abounds, but we do know that workplaces will undergo (potentially lasting) change.
Health and safety will be a huge factor, with social distancing requirements and even temperature testing being introduced in some buildings, but flexible working arrangements will also determine how future offices will look.
“The most notable was when almost overnight the office-bound workforce globally relocated to their homes,” she says.
“The digital transformation of our organisations was achieved not through management strategy or a new technology solution, by the realities of this virus.
“For the first time in modern history working from home became the norm and even ushered in the three-letter acronym to describe it: WFH. And it is here to stay.”
In the future it is likely we will see our office spaces change to accommodate more flexible working styles and less people in them all the time, says Fell, with most workers in this knowledge economy having more of a regular opportunity to work a day or two from home.
“Our national survey amid the COVID-19 crisis showed that 69% said they were as, if not more, productive when working from home than they were at their office.
“It also showed that far from being a temporary response to a global pandemic, 78% said that working from home will become the new normal.”
Workplaces will also change to become COVID-safe, enabling social distancing and safety and health measures.
Property Council Chief Executive Ken Morrison says the Property Council has worked closely with Safe Work Australia on guidelines for office buildings, including how to manage lifts, common areas of buildings and change room facilities for cyclists and people running or walking to work.
“There is now comprehensive advice available to help building managers and businesses to make their workplaces COVID-safe. Our members have been proactively addressing these issues to provide a COVID-safe environment for their tenants and their workers.
“As people are able to return to their offices, we believe they will do so in increasing numbers depending on their local public health restrictions.”
Offices are here to stay
With more people working from home it is likely we will see less demand for full utilisation of office spaces that has been the norm over the last few decades, says Fell. But that doesn’t mean offices will be gone entirely.
“The office will still be important in the future, but likely for collaboration, creativity and social interaction – the parts of work that are harder to achieve when workers work remotely.”
While there are some who say COVID-19 is the death of the CBD or the office building, says Morrison, and we may see some tenants provide more of their people with flexible working arrangements, at the same time they may also need more space in their offices to accommodate physical distancing.
“There may be some changes to the way we configure our offices, but they will still be a very important part of our working lives.”
While Australians have shown great versatility in making the shift to working from home, many are keen to get back to their workplace and reconnect with their work colleagues in person, adds Morrison.
According to an ABS survey recently, 86% of working Australians were somewhat comfortable in resuming attendance at their usual workplace, he says.
“There are lots of positive benefits to working in an office including the opportunities they present for critical ingredients for business success, including collaboration, creativity, innovation, learning, mentoring and developing and sustaining team culture.
“Many businesses have been able to manage remote working so well because of the close internal and external networks that their people developed in the pre-pandemic. Businesses have been surfing off the previous benefits of working in offices.
“It’s also a practical issue – not everyone can do their jobs as safely or efficiently from home, so we need to make sure that our CBDs and offices are open and working again to support those businesses which need a physical premises for their staff.”
LJ Hooker Commercial Managing Director Mathew Tiller says while there will be some businesses that see COVID-19 workplaces changes as a way to reduce costs and move some work online, many businesses will be unable to reduce their office space as they will need to ensure social distancing requirements are maintained.
He says those in the former category are also unlikely to do away with the office entirely.
“They will still need a central point to meet; a place where employees can catch up and engage with others.
“Working from home is great in terms of not having to commute to the office, but human interaction is also still very important for culture of work and mental health of employees. It also cultivates ideas and strategy.
“There will always be a need for office space; it will just be used differently and for different purposes.”
Tiller says the location of offices may also change, with many businesses likely to consider moving from the CBD to a suburban office closer to where employees live.
What do I see when I look into my crystal ball?
From an Investor Viewpoint:
In my view office buildings will become more spread out over time. We may find more suburban co-work spaces in the future. People will still want to physically interact, albeit less often.
I can see some CBD Offices being converted to residential over time.
I can’t see too many new office buildings being given the green light in the future.
Smaller office spaces may become more in demand as companies downsize to reflect the new working from home reality.
If you don’t own an office and are thinking of having a small hub where workers can get together and share space, now might be a good time to start looking.
From a Tenant Perspective:
If you are a tenant with a lease that’s about to expire, now could be a good time to negotiate.
You may have a clause that allows you to “re-set” the rent based upon an independent market valuation, rather than an automatic increase or linked to CPI.
I expect to see a lot of sub-leasing space coming onto the market over time.
As a rule of thumb, businesses require roughly between 8 and 12 square metres of gross space per employee. With more employees working from home, companies could in effect get two employees in that space on a co-sharing basis, thus reducing the need for office space in the future.
If you’re looking to invest in real estate, commercial properties present plenty of opportunities. However, you need to consider the risks and market drivers. This commercial property investment guide will help you.
You must think about more than the property investment basics when investing in commercial real estate. There are many complex market issues at work, which means you take on more risk.
Understanding these issues will play a role in the success of your investment in real estate. Commercial properties come in all shapes and sizes, which you must account for. This commercial property guide will equip you with the tools you need to succeed.
The Market Drivers
Several drivers affect the state of the commercial real estate market. You must understand what these drivers are before you can invest successfully. They include the following:
The strength of the economy. A weak economy means there are fewer businesses available to lease your property. Keep an eye on the data. For example, transport sector growth indicates that an economy is getting stronger.
Infrastructural improvements influence businesses’ decisions. For example, the building of new roads usually results in an influx of companies to an area. Buy your commercial property with future developments in mind.
The Reserve Bank of Australia’s (RBA) interest rates have an effect. If interest rates are on the rise, you’ll find less success with your commercial property. The cost of money increases. This places your potential tenants under greater financial strain. Conversely, low interest rates lead to more demand.
Population growth in certain regions will affect your decisions in real estate. Commercial properties do well in areas with large populations. This is because the demand for services increases, which leads to an influx of businesses into the area.
You should also consider population demographics. For example, areas with a lot of retirees will have more need for medical services. However, areas with lots of children need more family-oriented services. Use population demographics to find out about the types of businesses that will express an interest in your property.
There are also several risk factors to consider when you invest in commercial property. Here are some of the most important:
Commercial properties tend to stand vacant for longer than residential properties. You will have to handle the costs of the property during such periods. As a result, it’s usually best to tie commercial tenants to long-term leases.
New property construction always presents a risk to your investment. Your tenants may decide to explore their options, which could lead to vacancies. It’s the issue of supply and demand. The more supply, the harder it is to find tenants. You also won’t be able to charge your tenants as much when there are other options available.
Size is an issue. Large commercial plots cost a lot more to maintain, and are only suitable for certain types of business. Smaller plots may be cheaper, but they also have their limits. You must consider the local demand for services before deciding on the size of your commercial investment.
Infrastructural improvements in other areas represent risks for your established commercial properties. Your tenants may make the move to the new area, which means you lose out. As a general rule, try to invest in properties that are close to central business districts (CBDs).
A poorly-constructed lease could lead to the failure of your commercial investment. These are the factors to consider when creating your leases:
Commercial leases can extend from three years up to 10. The longer the lease, the less risk of vacancy. However, a bad tenant on a long-term lease could cost you. Offer the option to renew if you’re confident in the tenant’s ability to make on-time payments.
Link your rent increases to the Consumer Price Index (CPI).
You may require council approval for some types of business. For example, chemical treatment plants need to have the correct documentation.
Insert a condition that compels the tenants to revert the property to its original condition upon leaving. This will make it easier for you to rent the property out again when you current tenant departs.
What Else Should You Consider?
Further to this, you need to arrange proper financing for your purchase. Many residential lenders can’t help you with commercial properties. As a result, you may have to locate a specialty lender. Furthermore, you may not be able to borrow more than 70% of the property’s value.
You’ll also deal with a commercial agent, rather than a real estate agent. These professionals specialise in attracting the right businesses to your property. They’ll also help you to create attractive deals for potential tenants.
The Final Word
As you can see, commercial investment is a complex subject. This commercial property guide will equip you with the tools you need to succeed.
The team at Washington Brown can also help you to claim depreciation on your commercial property. Contact us today to speak to a Quantity Surveyor.
You have a choice to make when investing in real estate. Commercial properties may be more difficult to manage than residential homes. However, there are plenty of reasons why you should invest in commercial property.
So, you’ve decided to invest in real estate. Commercial properties may not seem like the best choice. They come with more complications than residential properties. This means you need to know more than the property investment basics. However, many argue that the benefits of commercial property outweigh the complications.
When investing in real estate, commercial properties may offer more security. However, there are plenty of other reasons for why you should consider them as an option.
Reason #1 – Stronger Yields
What rental yield should you aim for? This is a question that plagues many property investment novices.
Residential properties tend to offer lower yields. According to CoreLogic RP Data, you’ll achieve an average yield of 3.6% on a city-based residential property.
You can expect to earn anywhere between 8% and 12% yield on a commercial property. As a result, commercial real estate will often generate more income than a residential property.
Reason #2 – A More Secure Income
People often focus on risk when discussing commercial property. In particular, they concentrate on the issue of attracting tenants. You need to consider the needs of people in the local area. How your property caters to businesses relevant to those needs is also a factor. If your property doesn’t fit the bill, you’ll find it difficult to attract commercial tenants.
However, many ignore income security. With a residential property, you may find that a tenant leaves after six months. This means you have to go through the process of filling the vacancy again.
By contrast, a commercial lease lasts between three and 10 years. This means your property generates more income for a longer period of time. As a result, you can feel more secure in your income, and as a result make other investment decisions with more confidence.
Reason #3 – Rate Payments
You’ll often take on the responsibility of paying various rates with a residential property. In addition to council and water rates, you may also have to cover body corporate fees.
This isn’t an issue with commercial real estate. Commercial tenants will handle the rate payments for you. As a result, you spend less on the property each month.
Reason #4 – The Tax Benefits
Though you’ll enjoy various tax benefits with residential real estate, commercial properties have even more to offer.
Beyond capital works depreciation, you can also claim depreciation on plant equipment. This includes depreciation for air conditioning units and light fixtures. You can even claim for things like the carpet.
That’s not all. Commercial properties also offer strong building allowances, which you can use to reduce the amount of tax that you pay.
Reason #5 – A Lower Initial Cost
Commercial properties often cost less than residential properties. This is despite the potential they have to generate higher yields. For example, you may spend $100,000 on a commercial car park. By contrast, a small residential apartment could cost as much as $500,000.
As a result, you need to raise less money to get on the commercial investment ladder. Let’s assume you can get a loan worth 80% of the property’s value. That means you only need $20,000 to place a deposit on the commercial car park. The apartment deposit would cost $100,000.
Reason #6 – Protection Against Inflation
Inflation can have a massive effect on your property investments. If inflation rises, tenants have less money. With a residential investment, this leads to higher vacancy rates. You’ll also struggle to raise rents because tenants can’t afford higher prices.
You’ll deal with similar struggles when investing in commercial real estate. However, commercial yields tend to outstrip inflation. As a result, you have more protection when inflation becomes an issue. Even if you can’t raise your rents, a commercial property should still generate an income.
Reason #7 – You Can Rent and Own
Let’s assume you’re a business owner. You may want to buy an office, but that won’t make any money for your company. However, leasing means that your money goes straight into the pocket of an investor. What can you do?
With commercial property, you can own the property you rent. You can make the purchase itself using a self-managed superannuation fund (SMSF). Your business then moves into the property, during which time it pays rent into the SMSF. As a result, you essentially pay yourself, rather than a landlord, for use of the property.
The Final Word
There are many reasons to invest in commercial property. However, you need a high level of expertise to make the most of your investment.
Washington Brown can help with any depreciation concerns you have. Contact us today to find out how our Quantity Surveyors can help you to get more out of your commercial property investment.
So how does commercial property really stack up against residential in relation to depreciation?
While we have covered the differences between the two, there are also some similarities.
For example, the higher the quality of the commercial property the higher the depreciation. And the taller the building in commercial property, the higher the depreciation allowance. This is the same for residential property. Also, similar to residential property, the newer the building, the higher the depreciation allowance will be.
Note, also, that you will get more depreciation on a commercial suite than a factory unit or industrial suit). This is because a factory unit does not have as much plant and equipment. It is nearly all made up of concrete and steel.
In short, if you are the tenant in a commercial property, and think now might be a good time to become the owner-occupier, don’t forget to claim those tax depreciation allowances available to you as a landlord.
Or if you’re an investor, don’t exclude commercial property as an option. The depreciation is still beneficial as yields can be higher.
Let me share with you two projects we’ve worked on across various sectors. Including commercial, hospitality, retail and office/warehouse to illustrate the depreciation benefits for different investors.
CASE STUDY: Lend Lease
When I started way back when, never in my wildest dreams did I think I would be preparing reports for a multi-national company like Lend Lease. But I’m proud to say, over the years we have prepared many reports for them. From multi-million dollar shopping centres in Victoria and New South Wales, to factories in Queensland, and retail warehouses in New Zealand. Lend Lease likes that we go the extra mile.
The key to preparing depreciation reports on these types of commercial and industrial properties lies in the research.
For example, Lend Lease purchased a 20,000 square metre shopping centre in Port Macquarie. The site had already undergone multiple upgrades over various years. One approach would have been to visit the site and make an estimation based upon any drawings we might have been provided with, inspect the site and discuss any changes that may have occurred with the building manager. But I always find that you need more than that.
With large projects such as a commercial shopping centre, you should always contact the council and sift through the endless archival documentation they have. This can sometimes take a whole day. There can literally be hundreds of files to sift through as each time a new tenant moves in and out, council generally has records of that move. Every time the previous building owner made changes to the building, council will have recorded the event. The advantage of going to council is that you ascertain when and what type of upgrades were completed. Sometimes the information even includes the estimated cost of the upgrades and plans of the work that occurred. This builds up a great case to go back to the client and say, “Look at all this extra stuff we discovered you can claim, and here’s how we can prove it.”Lend Lease liked that.
CASE STUDY: Ford Factory
When I first started preparing depreciation reports, I initially focused on residential investment property. Not because the reports are that different, we just hadn’t been engaged to prepare reports for commercial property. So when one of my mentors, the distinguished quantity surveyor Jim Ford, offered me the opportunity to work with him on the depreciation report of a Ford factory in Queensland, I jumped at the chance.
Off I flew to Jim’s office in Brisbane and started work on this project. I had never been to another quantity surveyors’ office before and I have to admit I was nervous.
I sunk my teeth in. The more I researched the part of the Tax Act relating to the manufacturing industry, the more areas I found where we could save our client money.
Remember, this was early on in the game. There were very few quantity surveyors specialising in this area. I discovered a little known part of the Tax Act that allowed this type of factory to claim building allowance at a rate of 4% per annum in comparison to the standard 2.5% per annum. You may think 1.5% doesn’t sound like a lot, but on a $10 million construction cost – that’s an extra $150,000 the client could write off every year.
Make Sure You Claim All Depreciation on Your Commercial Real Estate
If you’re thinking about buying commercial real estate in Melbourne, you need to prepare yourself. Many people fail to claim the commercial tax deductions in Australia that are due to them. This results in thousands of lost dollars.
You can claim for all sorts of things on your commercial real estate property. For example, you can claim deductions for the wear and tear of your fittings, furniture, and the structure itself. In fact, making the right deductions at the right time can affect cash flow. You can change a negatively geared property into one that enjoys a good cash flow.
So now you’re probably wondering how to maximise depreciation on your commercial investment property in Australia. Our guide will show you how.
Get the Ownership Structure Right
How you buy your commercial property is just as important as the type of property you buy. You need to have the right structure in place if you’re going to claim the maximum depreciation.
For example, you can increase your deductions if you buy the property using a trust. The same is true if you buy with your self-managed superannuation fund (SMSF). In both cases, you can split your deductions. You can make claims on the building as a standalone entity. Furthermore, you can also claim on any tenancy assets. However, you must operate a business in the property to do this.
Furthermore, you can claim for any capital works you undertake during your ownership. These can include extensions and many other general improvements. Finally, if you occupy the building as a business owner, you can also claim depreciation for any fixtures or fittings. Again, you must use these as part of your business operations.
Maintain Your Records
It should go without saying that it’s vital that you maintain accurate records if you want to claim commercial tax deductions in Australia. However, a remarkable number of people don’t do this.
Document every expenditure that relates to the building. These include both the immediate and ongoing costs. Furthermore, you should add day-to-day expenditure to the list. Keep anything that relates to a financial transaction involving your building. These records can help you to claim more.
Use a Quantity Surveyor
Every commercial property investor should employ the services of a quantity surveyor. These professionals can help you to create depreciation schedules. A good schedule ensures you can claim as much as possible on your property.
A quantity surveyor will carry out regular inspections of your property. These help to determine what deductions you can make each year. They’re ideal for long-term planning as well. A good depreciation schedule will lay out how to claim deductions for the next 40 years.
Furthermore, quantity surveyors understand how to maximise your depreciation based on your timeline. You may only intend to invest in the property for a short period of time. That’s okay. A good surveyor will take this into account, just like they would for a long-term investment.
It’s likely your surveyor will recommend the diminishing value method if you’re a short-term investor. This assumes the value of your assets depreciates most during their early years. As a result, you can claim for more depreciation in the short-term.
Long-term investors may prefer the prime cost method. This assumes uniform depreciation over the lifetime of your assets. As a result, you claim the same amount each year, rather than the bulk in the early years.
Which method works best for you will depend on the time commitment you make to your commercial real estate investment. A good quantity surveyor can talk you through the different timelines.
Take Advantage of the First Year
Your first year of ownership is vital. It’s when you will set up the structure through which you will manage your commercial property for the years that follow. Getting things wrong during the first year makes things more difficult than they need to be later on.
However, you also need to take depreciation into account from the moment you invest in the property. This is where your quantity surveyor can help again. You may be able to depreciate some of your assets faster with a commercial property than you would a residential one. Your surveyor will point this out to you. As a result, you can make more upfront savings using depreciation, which means you have more cash to use during that difficult first year.
The Final Word
Maximising your depreciation from a commercial property isn’t easy, but you can do it. Use the services of a reputable quantity surveyor and don’t put anything off.
Remember that you can make claims for depreciation from the moment you invest in the property. Don’t lose money because you were slow on the uptake.
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