on 9/27/2018
Who would not want a "ready-to-go and secure" real estate investment leased to a listed tenant on a secure long-term lease?
The benefits of owning investments in well-rented commercial properties are obvious and include long-term leases, high-quality tenants and often attractive tenancy arrangements, including fixed annual rent increases. They also typically provide net terms – where tenants are responsible for paying expenses – and above all higher yields, typically net returns between 4% and 8% and sometimes higher.
Now, let's compare that with residential investment. Instead of net rental conditions, yields are generally less than 4% gross. This means that the true net return is even lower once you consider expenses such as overheads and advisory rates, for example.
Then there is the quality of the tenant. In simple terms, private tenants will generally be less secure than domestic or global firms, who are often intrinsically invested in the properties they occupy because of extensive tenant development and the continuity of the growing number of customers visiting their homes. sites over time. .
So, what traditionally prevents private investors with modest budgets from investing in commercial real estate? We believe that this is mainly due to the high perceived cost of entry into this category of investments.
Since the price of an apartment in Sydney can be, for example, $ 700,000 and the house price is around $ 1.1 million, most people do not realize that Commercial investment properties are available at prices similar to those of dwellings.
In recent times, this perception has begun to evolve with the cooling of the residential market. More and more buyers are frustrated by the lack of value in the residential market and have begun to embark on investment in commercial real estate.
For example, some powerful regional investment properties sold recently, such as the ANZ Bank branch in Narrabri for $ 880,000.
Narrabri is a regional NSW town located northwest of Tamworth and Port Macquarie, approximately 520 km from Sydney. The new business owner of this investment receives an attractive net return of 6.53%.
Similar commercial investments that are performing very well include a Liquorland site in Mount Sheridan, a suburb of the far north of Queensland on the outskirts of Cairns.
A Bowral Millers fashion store, purchased for $ 970,000, offers its new owner a net return of 5.55%. And a strata store leased to a store specializing in the trade of bottles at Union Place, just 4 km from Sydney's central business district in Rozelle, recently sold for $ 700,001, offering to its new owner a net yield of 5.40%.
This was a perfect commercial investment for the first time, generating a net return of $ 37,850 a year and attractive annual rent increases of 4%. Burgess Rawson also recently sold a diaper unit to Figtree from Wollongong; It was then rented to Domino's Pizza for $ 1.2 million, a return of 5.32%.
This is another example of entry-level commercial investment and reflects the current trend towards fast-food real estate assets, which are highly sought-after properties in today's market.
With a low risk profile, they perceive a particular demand from investors with self-directed super funds, as they offer long-term indexed income streams backed by high property values.
In terms of price, the value of fast food real estate assets typically ranges from $ 500,000 to $ 6 million, with incomes of about $ 35,000 a year for a small storefront in a regional city.
There are a significant number of opportunities for investors looking to buy commercial real estate. That being said, commercial properties do not operate in the same way as residential properties, so investors need to keep some factors in mind.
Commercial Investments in Do's and Don'ts
Australia's love affair with bricks and mortar is evolving to include commercial property, but there are some general guidelines that investors must follow if you want to succeed in this space. My to-do list includes:
1. Adjust your state of mind
Having a "site-specific" mentality is often the main driver of a residential investment, but this is not always the case with commercial buildings.
The main factors to consider when buying a commercial property include the type of asset class, that is, fast food, childcare or government tenant; the strength of the tenant profile; and the lease term in place.
In most cases, the longer the lease, the more secure your investment. The above three factors are often better ranked than the location. It is therefore best to analyze and determine the outcome of each to ensure that your commercial property will be a successful investment.
2. Attend the auction and educate yourself
You can never have too much knowledge about commercial real estate and a good place to start is to familiarize yourself with the auction environment.
Attending an auction can greatly enhance your understanding of the fundamentals of commercial property, price and returns to product quality and the interest of the buyer.
Burgess Rawson's portfolio auction takes place every six weeks in Sydney and Melbourne. They constitute an excellent platform for this educational process. There is a wide variety of commercial investments, representing different income brackets and a wide geographical distribution.
They provide an instant snapshot of the market and the type of property in which you want to invest.
"There are significant opportunities … however, commercial property operates a little differently from residential property"
3. DO COMPARISON OF LINKS OF
When it comes to comparing the performance of a residential investment with that of a commercial property, it is essential to identify the net result.
Commercial returns tend to be expressed in net terms after deducting all expenses, while residential returns are often calculated in gross terms, excluding expenditures, which is incorrect.
In order to determine real net income and to avoid being misled, we encourage potential buyers to conduct a thorough research of financial data as part of the due diligence process.
It should be noted that several commercial leases are structured in net terms, the tenant paying all statutory expenses, including insurance and property tax. Many beginning business investors find this surprising, but it is only another benefit of commercial investments compared to residential investments.
4. DO NOT diversify your portfolio
Similar to a stock market portfolio, diversifying your commercial real estate portfolio can have many benefits. By investing in different asset classes (for example, medical care, gas stations or liquor) and in different geographical areas, you reduce your risk as an investor.
If a property does not yield the expected results, investments in other property categories could perform better than expected over the same period.
In addition, by diversifying your commercial property portfolio, you do not rely solely on a source of income.
5. THINK at Regional Locations
There is no need to limit your search to major capitals. The stock of investment quality is often insufficient, so it is important not to limit yourself.
Expand your network and research, and examine the benefits of metropolitan and regional areas. Some investors may become obsessed with investing only in major capitals; However, there are many regions with equally solid growth prospects.
If, like most investors, you are a performance-oriented investor, keep an eye on regional properties leased to renters of reputable brands, as you will find that they generally generate more attractive returns.
6. Familiarize yourself with the basic conditions of commercial leasing
Becoming proficient at reading and understanding the key terms of commercial leases could mean the difference between investing in a good property or a failure.
It is important to understand the obligations of the landlord and the tenant, as well as the provisions for the review and revision of rent, as the lease is often the basis of the underlying value of the investment.
Again, an auction of Burgess Rawson's portfolio is a fantastic environment to better understand and understand the terms of the leases. Now that I've explained what to do in investing in commercial real estate, here are some tips on what investors should not do when investing in this property:
1. DO NOT BELIEVE that there is a single return.
A commercial return encompasses everything and reflects the specific characteristics of the proposed investment, including the location, the strength of the tenant's profile, the lease term, the size of the land, the potential for development and the structure of the property. rent review.
"Some powerful regional investment properties have sold recently, such as the ANZ Bank branch in Narrabri for $ 880,000"
The greater the number of boxes ticked by a preferred investor checklist, the greater the yield will be constrained by increased competition (and therefore, the higher the price will be).
2. DO NOT engage until the funds are in the bank
A common mistake we have seen occurs when an investor relies on funds from the sale of a property to finance another property, and then agrees to buy it before it gets to them. materialize.
This activity involves a huge risk, which can easily be avoided if you are waiting for the settlement of your other property and the money is in the bank.
3. Do not bid without financing in place
Bidding without funding in place will only increase your stress level and make the future uncertain. Proper due diligence is essential, especially if you are new to the commercial real estate market and you come from residential investing.
The terms of the business loan may vary depending on the type of asset class, so always be sure to do your research and have the funds easily accessible.
4. DO NOT buy without the advice of a professional
Asking for accounting advice and legal advice before bidding at an auction will help you immensely in the buying process.
We have repeatedly found that successful bidders are not certain of the procuring entities, resulting in frantic phone calls to lawyers during the registration phase.
You must know that the buying entity is in place, for example a SMSF, before launching an offer.
5. DO NOT STAY on an investment of the first order
Naturally, first-rate investments in large funds are attracting a lot of interest and inevitably a lot of competition. Do not stand back if it's really a top-notch asset, and accept that other parties are also working to protect it.
Do not forget that the reasons why you like investing are undoubtedly the same as those of others because it matches most of the boxes of a successful investment in the company. 39, commercial real estate.
6. DO NOT rely on the agent's marketing material
Agents' marketing materials, such as information memoranda, generally help to understand the essential aspects of a commercial investment property, but it is advisable to be more diligent and ask for a sales contract.
This is the legal basis of the sale and should therefore be reviewed by you and your lawyer to mitigate the potential risks associated with the proposed investment.
RULES FOR LEASING YOUR COMMERCIAL PROPERTY
If you plan to acquire a commercial property through your SMSF and you plan to rent it to your business, you must meet certain conditions:
– If you rent the property to a business that you operate, the lease must be at the market rate.
– You can not ignore rent payments – payments must be made on time and in full, as if you were renting to a stranger.
– The property must be assessed independently and regularly.
– The sole purpose of the investment is to provide a retirement benefit to SMSF members.
Simon Staddon
is director of Burgess Rawson
and is over 35 years old
experience of commercial real estate
in the United Kingdom and Australia
Can you afford to buy in this suburb? Find out how much you can borrow
