The asset class tour

Warehouses, shops, offices, medical suites and childcare centres are five different games wearing the same “commercial” jersey. Here is how each one plays.

“Commercial property” is a category the way “sport” is a category. Industrial, retail, office and the specialised classes differ as much as cricket differs from boxing. This chapter walks the main options at the scale an SMSF actually buys: roughly $300,000 to $1.5 million, the strata unit and freestanding end of the market, not the CBD tower end.

For each class you get the same five things: what you are buying, typical net yields as I write, what drives the value, what the tenant risk really is, and how lenders feel about it. Treat the yield numbers as a snapshot for orientation, not gospel for your deal.

Industrial: the training ground

What you are buying. Warehouses, workshops, storage units, small factories. At SMSF scale, usually a strata industrial unit of 100 to 500 square metres in an industrial estate, or a small freestanding shed on its own title.

Typical net yields: roughly 5 to 6.5 per cent.

What drives value. Land, location relative to transport routes, clearance height, roller door and truck access, power supply, office component. Industrial demand has structural wind at its back: online retail needs sheds, tradies need workshops, and cities keep rezoning industrial land into apartments, shrinking supply.

Tenant risk. Moderate and mercifully generic. A basic warehouse suits a huge range of businesses: the plumber, the importer, the gym equipment wholesaler, the e-commerce brand. When one leaves, the replacement pool is wide, which keeps vacancies at the shorter end of commercial.

Lender appetite. The strongest of any class at this scale. Standard industrial is the asset banks understand best and discount least.

The honest picture. If commercial property has a training ground, this is it. Simple buildings, broad tenant pools, transparent pricing per square metre, and the friendliest financing. The trade-off is popularity: everyone else has read the same analysis, and good industrial is rarely cheap. You will also want an environmental question or two in due diligence, because industrial land can carry contamination history. Chapter 12 covers it.

Retail: position is everything

What you are buying. Shopfronts on strips, standalone convenience retail, units in neighbourhood centres. At SMSF scale, typically one shop with one tenant.

Typical net yields: roughly 5 to 7 per cent, with the range wider than any other class because retail quality varies so brutally.

What drives value. Position, position, foot traffic. The difference between the good end of a strip and the dying end can be 50 metres and 30 per cent of value. Anchors matter: the supermarket, the medical centre or the train station that delivers bodies past the door. So does the tenant’s business itself; food, services and convenience have weathered online retail far better than discretionary goods.

Tenant risk. Higher than industrial. Small retail businesses fail at meaningful rates, and a shop fitted for one concept may need capital to suit the next. Judge the covenant hard: an established franchisee of a national brand and a first time café dreamer can be offered to you at the same yield.

The legislative wrapper. Retail premises are governed by state retail leasing legislation that overrides parts of whatever lease you sign: disclosure statements, minimum five year terms in several states, restrictions on ratchet clauses, and rules about outgoings recovery. Learn the local Act’s greatest hits before you buy, and note the standout money detail: in Victoria, land tax cannot be recovered from a retail tenant. On a Victorian shop, land tax comes straight off your net yield, and plenty of interstate buyers discover it at their first reconciliation.

Lender appetite. Decent for well located strips with solid tenants, noticeably cooler for secondary strips and vacant shops.

Suburban office: cheap for a reason

What you are buying. Strata office suites and small freestanding office buildings in suburban centres. The CBD is a different market and mostly a different price bracket.

Typical net yields: roughly 6 to 8 per cent, the highest of the mainstream classes.

What drives value. Tenant demand, parking, amenity, and the great post pandemic question: how much office space does anyone need? Hybrid work permanently softened demand for commodity office space, and the market has repriced it, which is exactly why the yields look juicy.

Tenant risk. The highest of the mainstream classes. When an office tenant leaves, the next one wants a different layout, an incentive and a rent free period, and the vacancy can run long. Small professional tenants, the accountants, engineers and allied services that fill suburban suites, are decent covenants individually but mobile as a group.

Lender appetite. The most cautious of the mainstream classes. Expect harder questions, lower loan to value ratios and more interest in the lease tail.

The honest picture. High yield is the market paying you for uncertainty. Suburban office can absolutely work, particularly medical adjacent or owner occupied suites, but a first time SMSF buyer chasing the 8 per cent should understand they are being paid danger money and price the incentives honestly. If you cannot articulate why this particular office will stay let when the market is oversupplied, that is your answer.

Medical and allied health: sticky tenants, specialised boxes

What you are buying. Consulting suites, GP clinics, dental and physio rooms, often near hospitals or in health precincts.

Typical net yields: roughly 5 to 6.5 per cent, tighter than generic office because the market prizes the tenants.

What drives value. Demographics and stickiness. Health demand grows with an ageing population regardless of the economy, and medical tenants invest heavily in fitout, patient bases and approvals tied to the address. A practice that has spent $200,000 on rooms and a decade building local patients does not move to save $50 a week. Long leases and high renewal rates follow.

Tenant risk. Low while occupied, lumpy if vacated, because the replacement tenant is probably another practice, and the pool of practices seeking rooms in your suburb this year is small. Specialised plumbing, lead lined walls and approval requirements can make conversion back to generic office expensive.

Lender appetite. Good, particularly with established practices and lease terms to match.

Childcare and other specialised assets: the covenant is the investment

What you are buying. Purpose built childcare centres, service stations, gyms, fast food pads, medical imaging. Single tenant, long lease, purpose built.

Typical net yields: roughly 6 to 7 per cent for childcare, with the others scattered around that band.

What drives value. Almost entirely the lease and the operator. These assets are effectively bonds wearing buildings: ten or fifteen year leases, fixed increases, tenant pays everything. The land and structure have limited alternative use; the income stream is the product.

Tenant risk. Binary. While the operator thrives, this is the easiest ownership in property: the rent arrives, the tenant maintains, you do almost nothing. If the operator fails, you own a building shaped exactly like their business and nothing else, in a market where the only buyers and tenants are their competitors. Regulatory and funding settings, in childcare especially, can move the whole sector’s economics at a budget’s notice.

Lender appetite. Conservative. Lower loan to value ratios and hard questions about the operator, because the lender can read the paragraph above too.

Grace walks away

Grace found a childcare centre in a growth suburb listed at $1.1 million on a 6.8 per cent net yield. Ten year lease, national operator, fixed 3 per cent annual increases, tenant pays all outgoings. On paper, the perfect retirement asset: $75,000 a year, indexed, hands off.

She did the work this chapter teaches. The operator, it turned out, was a franchisee whose parent company had closed centres in two states the previous year. The building was purpose built to childcare regulations, on a main road block that would need rezoning for any other use. Three other centres operated within two kilometres, and the licensed places in the catchment already exceeded the enrolment projections she could verify.

Grace asked herself the specialised asset question: if this exact tenant fails, who is the next tenant, and what do I spend to get them? The honest answers were “another childcare operator, in an oversupplied catchment” and “possibly six figures and a year of vacancy”.

She walked away, and later bought two industrial strata units on separate titles for a combined $1.05 million at 5.9 per cent net. Lower yield, lower drama, two tenants instead of one, and a buyer pool measured in thousands rather than dozens.

The lesson is not “never buy childcare”. Plenty of childcare assets perform beautifully. The lesson is that in specialised property, the covenant is the investment, and the yield premium is the market quoting you a price for that concentration. Grace decided the premium was not big enough. That is what pricing risk actually looks like.

The specialisation trap, stated once

Line the classes up and one principle organises everything: the more purpose built the asset, the thinner the pool of tenants and buyers, and the tighter the lending. Generic assets, plain warehouses, well positioned shops, trade at lower yields because anyone can use them and everyone will finance them. Specialised assets pay you more because fewer people can ever take them off your hands.

Neither end of the spectrum is wrong. But a first direct commercial purchase inside an SMSF, where the fund’s diversification is already stretched by one big asset, generally belongs toward the generic end. You can buy the exotic yield with your third property. Buy the boring liquidity with your first.

Find your sweet spot, or have the guts to walk away.