Why retail shop tops make excellent first commercial investments

By Kristian Morris

When you’re constructing your property investment portfolio, at some point you’ll hear that ‒ to enjoy stable returns ‒ you’ll need to diversify. Most often you’ll be advised to take a leap of faith and invest in commercial property. But what type of commercial property offers the most reliable cash flow? 

Take a bow, shop tops.

What are retail shop tops?

You’ll see them along the various precincts of Parramatta Road, on Norton Street in Leichhardt, King Street in Newtown and Darling St in Balmain and Rozelle, to name just a few precincts. 

Retail shop tops are premises with retail on the ground floor and storage or accommodation on the first floor or sometimes at the back. Whether or not the upstairs portion can be leased as residential will depend on the council zoning.

Advantages of mixed-use properties like shop tops

A shop top is what we call a ‘hybrid’ model. The ground floor is commercial space while the upper floor is usually residential. This hybrid model can offer two income streams from one property while insulating you from real estate market trends. It’s rare that a downturn in residential also affects suburban retail and vice versa. 

Shop tops offer enormous flexibility along with exposure to passing trade as they’re usually located on main shopping strips, affectionately referred to in the UK as ‘high streets’. Your shop top is suitable for many different types of businesses, from solicitors and accountants – who might want a street presence as well as offices above – to window treatment makers and installers, fashion, food and beverage and many more. 

Many small business owners, especially those migrating to Australia from overseas, are keen to secure premises and accommodation in one location. Shop tops are in high demand from these types of purchasers or tenants who desire a workplace and a home.

Shop tops are becoming increasingly scarce due to the growth of suburban business parks and urban sprawl. Plus, shop tops are normally found in older more densely populated locations with good night time activity, excellent public transport options, and have an optimal-sized customer base on their doorstep.

Shop tops offer stable income

Commercial properties tend to have longer leases of at least three years and up to 25 years depending on the property, delivering more predictable returns for investors. 

While the residential component might not attract the same length of tenure if you need to rent the space separately, most tenants are ‘sticky’ provided the property is in good condition and remains well maintained.

If the entire property is zoned as commercial, you won’t have the option of residential. You do, however, have the opportunity to rent the space to a business that doesn’t require street presence. Think solicitors, accountants, psychologists, chiropractors, Work Health & Safety trainers, health and fitness operators or – the new kids on the block – ‘ghost’ kitchens that prepare food for delivery only.

Shop tops overseas

In Singapore, shophouses (as they call shop tops) are prized assets both for their historical value and their dual income streams. Shophouses command premium sale prices, in part because of generous government concessions.

How to sell your shop top

You’re the proud owner of a shop top but it’s time to retire or reposition your assets. What do you need to do to prepare your property for sale?

Most commercial buyers will be investors and they will look for the security of a long lease on the retail component and a well-thought-out lease for the residential component. At Ray White Commercial Sydney City Fringe, we are experienced in evaluating and negotiating leases that will appeal to commercial property buyers (or their accountants). 

Case study: Tenant to landlord to seller

Our seller of 97-99 Pittwater Road Hunters Hill originally owned and occupied the pharmacy. When the next-door building came up for sale, our client invested in the adjoining commercial property, which was a shop top. When our client needed larger premises, he chose to rent out both of these adjoining commercial properties.

Eventually, reaching retirement, our client asked for our advice on selling his commercial assets. We suggested that he offer both retail premises ‘in one line’, as one single sale, to attract buyers who might include developers looking to capitalise on the prime position of both assets. 

We sold both properties successfully in November 2022. Our experience with these properties and our client was as both the management agency and sales agent, demonstrating our ability to assist our clients with their needs over the lifetime of holding their commercial assets.

Let us help you with your commercial property

As dedicated local commercial real estate agents, we can help you extract more value from your commercial property. Please get in touch to discuss your circumstances and assets so that we can give you personalised advice. Whether it’s commercial leasing, management or sales, we’re here to help you with your Sydney-based commercial property.

Contact us at Ray White Commercial Sydney City Fringe

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