Von During explains that direct property investment is the acquisition of properties as opposed to shares in listed property companies.

“The factors supporting the continued growth of commercial rentals include limited zoned and serviced land available for development, escalating land and building costs and the current high interest rate environment,” says von During.

He explains that commercial property investments are often compared to bonds.  “As yields increase the asset value declines and vice versa. The major benefit of an investment in commercial property is the ability to gear a property asset, which in turn improves the return on the equity invested,” points out von During.

Gearing enables the investor to acquire commercial property by only contributing a portion of the capital required as equity, with the balance of the capital borrowed from a financial institution, while benefitting fully from the property’s rental income streams, notes von During.  The proportion of gearing is dependent on the institutions valuation of the property which is based on the physical property and the lease covenant.

The above financing model ensures that the revenue derived from rentals pays for a component of the commercial property investment.  As rentals escalate, the proportion of the investment funded by rental income also rises, allowing the investor to recoup equity invested, and reinvest.

In addition to gearing von During lists other benefits of direct commercial property investment as escalating income, security of tenure with commercial property leases being generally three years or longer, appreciating asset value, select tax-deductable expenditure as well as interest on bond repayments being tax deductible

“Access bonds provide funding flexibility,” says von During. “Direct investment in commercial property is also less volatile than equities”.

Commercial investment properties are generally trading at a substantial discount to replacement cost, reports von During who explains that market rentals are at a substantial discount to feasibility rentals.

With the escalating building costs cycle, buildings will become substantially more expensive to develop in the future and von During anticipates that this will result in escalating feasibility rentals which bode well for commercial property rental growth.

“The current differential between bank lending rates and the selling yields of commercial properties requires purchasers to invest substantial equity into deals,” says von During. “Buying well in the current market will ensure excellent income returns and capital growth when the current interest rate cycle reverses.”