When commercial real estate beats residential

Investors seeking regular income from real estate would be better off putting more of their funds into commercial real estate rather than residential property.

The average net income from Australian commercial property was 6.5% for the year to June 30, according to MSCI compared with 2.4% for houses and 3% for units (3.2% and 4.1% gross respectively at June 30, according to CoreLogic), after assuming expenses account for 25% of rental income.

The capitalisation rate for commercial property, which differs from net rental yield because it includes deductions for rental incentives, was 6.2% at June 30.

It's now at the same level as the peak of the last market cycle in December 2007, says Anthony De Francesco, executive director at MSCI.

Most investors access commercial property through listed or unlisted funds, as prime assets can be costly and investing through funds enables diversification for relatively low outlays.

Healthcare and hotel property were the best-performing sectors, showing income returns of close to 8%pa at June 30. This was after all expenses, except fund management fees. These two sectors also scored the highest total returns, 22.9% and 18.4% respectively.

Industrial property came next with a net rental yield of about 7.5%. The office sector provided around 7% and retail returned investors around 6% in rental income in the year to June 30.

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