Commercial Property as an investment for a Self Managed Super Fund

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There are several types of commercial property from SMSF investment perspective. The usual distinctions are industrial, commercial (as in: office space), retail. These are still relevant for SMSFs, but a sub-type should be added: ‘owner occupied’. For doctors it would mostly be either commercial or retail, few would set up a surgery in a converted warehouse.....Doctors also have an option for residential/professional, but that doesn’t affect the SMSF investing case.

What distinguishes commercial property from residential (other than the usually much larger amounts involved) are the investment returns and volatility. Commercial property tends to generate a much higher rental return than residential: typically between 6 and 9% rather than 2 to 5%. There is a reason for that: volatility. Whilst the rental returns are high when leased, vacancy rates are potentially a lot higher. Empty industrial sites, shops and offices abound and a vacancy can last many months or even years, no matter by how much you reduce the rent (or increase the ‘incentives’).

With all successful investing, you need to know what you do. If you don’t, you are speculating, not investing. This also applies to investing in ‘commercial’ property. It is even more relevant for such relatively large and lumpy investments. Industrial property e.g. has excellent potential – if you know what you are letting yourself in to.

Considering these uncertainties and risks, we would advise extreme caution when considering commercial property in an SMSF. But there is also good news...
Unlike residential property, business real property can be bought from a member by an SMSF. And here doctors have an advantage over most other investors: when buying their own rooms or surgery they know that they will have a model tenant (generally...), with the capacity to pay rent and a minimal risk of vacancy. The commercial business risk for doctors is minimal and the cash flow reliable.

It therefore makes a lot of sense for doctors to consider investing in their own rooms or surgery in their SMSF. There are of course various considerations, as there is no one-size-fits-all approach. A few of these considerations are:

  • Do you have enough liquidity in the fund AFTER the purchase?
  • How long do you expect to keep practising from that location?
  • Will there be a demand for these rooms when you leave?
  • Is there development potential in the future?
Where a commercial property is too expensive for your super fund to purchase, but otherwise the investment case stacks up, you could consider purchasing it as tenants in common (=defined ownership shares) with yourself or another ‘entity’.

Finally, although most lenders are becoming somewhat cautious about lending to super funds, there sometimes can be good reasons for the super fund to borrow to finance the purchase. It adds to the cost as a separate bare trust is required, but in view of the relatively high and secure return on the investment this may be less of a burden and risk than borrowing for residential property in a super fund.

Medical Accounting Services can help advise clients on whether commercial property investment in their SMSF is appropriate to their individual situation. Please contact us for more information.