Notes from How Investing in Commercial Property Really Works
Enhancing Property value ways: P13, P26
- Renovating, Improving the appearance eg.buy a rundown property and renovate
- Get a Longer lease with better quality tenants
- subdiving / enlarging
- renegotiate a property lease to reflect current rental
- Obtain permission for a redevelopment
- Renegotiating the Lease
- Changing the Use, eg. turn warehouse into a restaurant
- spotting opportunities in growing neighbourhoods
- find a vacant property and find tenant
- by investment clock/economical cycle
Lack of pricing Information ( for Commercial Property) P15
Investment Performance Index for CP by
- investment property databank (IPD)
- Property Council of Australia(PCA)
- regular report from Australian Finanical Review / The Australian
- JLL Research
- Collins Research
Property Investment Options
- Listed Property Trusts
- Property Securites
- Public Property Syndicates
- Direct Property Investment
- Mortgage Funds
- Mezzanine Finance
Four Phases of commercial property P28
- Phase one. usually at the bottom of economical cycle + over supply market condition, Vacancy rates may be high and rent is falling. However, new construction generally ceases. demand slowly starts
- Phase two: demand for new space grows but with little new construction, rents rise (sometimes sharply). developers again initiates the construciton
- Phase three: demand continues to rise, but supply is growing faster, rental growth may slow down
- Phase Four: the market is coming to a point of oversupply due to over-building, with the condition perhaps aggravated by a weakening economy
Commercial Property options:
- Office Supply. eg. governemnt tenants in Canberra. Tenants expect a high-tech infrastructure,even environmentally sensitive “green" buildings. Decentralisation makes major companies relocate to suburb
- Retail property. range from the major shopping centres to strip shopping street. It is important to consider the “anchor" tenants – generally large supermarkets or department stores that attract many customers.
- Industrial Property.yields have generally been higher than for other kinds, because many sites are purpose-built for a particular tenant or activity.therefore, it is difficult to find a replacement tenant but at the same time, tenants are reluctant to move. Performance of industrial property is geared fairly strongly to economic growth or new transportation facilities. Also, there is an established trend to convert industrial property in inner-city areas into housing. Factories generally need little maintenance or ongoing expenditure, it is well suit the “let and forget" small investor
- Hotels and Leisure property. Overseas/domestic tourists play a major role. It is a volatile business easily influenced by global economic conditions and dented by events like a new disease outbeak or terrorism. although with higher risk, it has been underperformed all other types of property investments.
- Retirement Property. an ageing population means retirement property has considerable investor potential.
- Infrastructure. Australia has a sophisticated system BOOT ( build,own,operate,transfer). eg. M2 motorway in sydney or CityLInk in Melbourne. Infrastructure assets usually operate in a monopoly or highly protected environment. it can make excellent investments for those looking for a steady stream of dividents with a relatively low level of risk. there is also the prospect of some capital gain as the economy grows and also the company diversifies into other projects. However, due to their heavy borrowings, the companies can be vulnerable to interest rte rises.
- childcare, health care, strata tile parking and long-term storage facilities
Your twelve buying criteria
- Tenant calibre and lease term. a strong corporate /government tenant and a minimum 5 year lease term
- Recent construction and flexible design. recent construciton => minimium mainetance cost + depreciation allowance. flexible design => efficient floor layout
- Lease structure and absence of competition. Lease structure=> frequency and method of reviews,who pay for the costs, what degree a tenant is responsible for building maintenance. annual rent adjustment ( CPI or fixed amount increase ?) Absence of competition => how many similar properties nearby
- good postion and emerging trends. emerging trends could include demographic trend ( population movements )
- Passing yield and zoning. Is current leasing rent below/above market value ? Zoning relates to your property’ present and potential future uses. ( check local council ). there are specific zoning and density changes occuring on a regular basis. you can often make windfall gains if you are astute.
- Title options and vendor motivation. can you subdivide the title for a parcel of land or an entire building.