When was the last time you met a small property investor with more than $30 million to spend?
Been a while huh?
And if you had $30 million would you use it to buy just 2 commercial properties, or are there better alternatives?
In a recent News.com.au article, one investor classified 'small people' as those buying up commercial property in the $10 million range. Firstly, most small investors have one residential property, perhaps worth up to $1 million, let alone the ability to invest $10 million into a single commercial property.
Apparently a retired doctor is "one of a large number of mum-and-dad investors turning to the commercial property market, snapping up everything from pubs and bottle shops to childcare centres and even digital billboards", according to the article.
Recently this property investor paid $10.95 million to buy the Bunnings warehouse in Swan Hill, Melbourne, offering a 12-year lease and a rental return of 5.1% per year. It seems the investor is only receiving yields of around 3% to 3.5% after rates, tax and other expenses, so 5.1% appears attractive. Although the article doesn't say if that is gross or net.
It's the second Bunnings store the doctor has purchased, after paying $21.3 million for the Bunnings in Ballina last year – according to the news article.
I should point out that one of the key differences between residential and commercial property is that with commercial property, the tenant pays rates, land tax and insurance, so there are fewer overheads.
Now Bunnings – the hardware retailer owned by Wesfarmers Ltd (ASX: WES) – is arguably one of Australia's best retailers, with a strong brand, growing sales and enviable profit margins above 11%. Owning the warehouse the store calls home is certainly appealing for those looking for a solid defensive asset.
But when it comes to generating the best return on investment, it seems our retired doctor has completely missed the ball.
Parking $10 million in shares of BWP Trust (ASX: BWP), which owns more than 80 Bunnings stores, would return him a yield of 4.8% in the past year, and rising, plus the chance to make capital gains. In the past year, BWP shares have risen more than 31% and 74% over the past 5 years. BWP distributions also come with some tax-deferred income, which can increase your return slightly.
It also means he'd have exposure to a diversified portfolio of Bunnings stores and there'd be less administration than looking after a commercial property. Personally, I know where I'd have my money – and I don't need to have $10, $20 or $30 million behind me. Alternatively, the property investor could buy shares in Wesfarmers, which is paying a 5%, fully franked dividend yield, which grosses up to 7.1% – 2% above the commercial property!
And therein lies the issue with many property investors. Very few seem to realise that shares offer consistently higher returns over longer periods. Yes, stocks may be more volatile – but if you are going to lock your cash up for 12 years (the length of the Bunnings lease), you can ignore short-term market fluctuations.
Foolish takeaway
Shares offer more consistent, higher returns against any other asset class over the long term. That has been proven many times. Commercial property investors buying properties for their 'huge' 5.1% yield are missing out on an even better alternative.
