Buying a bank...

[HiEquity]

Right, well we've got a little something on the hook but we're yet to land it. The option but not the obligation if you catch my drift... Interested in people's thoughts as to its attractiveness:

Pros
- 8 years left on the lease to one of the big 4
- CPI+1% annual reviews
- Market review in 3 years time (half way through lease), with a CPI+1% ratchet
- Two five year options, with market reviews - both ratcheted
- Within 10kms of a major capital CBD
- Fronts one of the biggest main roads in this capital city
- Right over the road from an exceptionally large shopping centre
- Around the corner from a major train station
- Tenant pays all outgoings
- Been a bank for twenty years
- Recently fully refurbished
- Within our price range!

Cons
- Was rented at a pretty high rent, courtesy of owner's contribution, in boom times, so now the rent is definitely above market
- So unlikely the market review in 3 years will be fruitful but you never know - at least the ratchets are there
- Strata title
- Old building although it looks new from the front courtesy of the refurbishment
- Structural risk sits with the LL, but insurance is paid for by Tenant
- Car parking spaces are "tight"
- Significant discrepancies between the wording of the Lease and how the relationship actually works - all of which favour the LL - eg direct payment of outgoings by Tenant's PM instead of annual reimbursement as stated in the Lease (hard to value that sort of thing)

With all that the net yield is a touch over 8%. It doesn't scream "bargain" but equally it seems a decent low risk proposition to cut our teeth on this CIP malarkey and actually get funding on decent terms. But it doesn't set the world on fire in terms of upside either so we're a little bit torn - post decisional dissonance is a wonderful thing for the property investor - it always happens to us!

Thoughts?

 

[Dazz]

Within our price range

Hi HiEquity,


As you know, this is the crucial limiting factor. I know how much effort and time you have put into the search, so there is no point me picking thru the details....you're big enough and ugly enough to do that yourself.


My only question is - how does it stack up against everything else you can also afford ??


If the answer is "better than anything else we've looked at" - then buy it.

If the answer is "seen better, but can't afford those" - then buy it.

If the answer is "seen better" - then don't buy it.


To give you some comfort, our first CIP was a strata unit, with an average Tenant signed up for 10 years, 1 year down, 9 to go. Risk was low compared to other future buys, but it suited us at the time as we had no idea what the hell we were doing, and no-one on the forum to ask questions of. The return off it has matched that low risk profile.


Have a chinwag with Kristine - I think she owns a Bank branch as well.


Good luck with your decision.

 

[Ausprop]

my CIP went up 67% over the last 2 or 3 years. Some of my resi has dropped 40%. the CIP is CF+. strange how people see comm as riskier than resi. What is risky to your financial health is CF-

a little off topic but it relates into your thoguht of going form res to comm. If you feel safer with resi, i have some great deals for you. think of all the tax you will be saving! you can buy the wife a new set of earings for xmas!

 

[WinstonWolfe]

I did some dd on this one a few months ago. 8.5km from cbd. Good southern suburb.

Wasn't prepared to accept any less than 8.0%.

The risks in my view are :

- I think there's reason to believe Aussie bank earnings won't see strong growth over the next 10 years, especially in the retail sector. Further, premium on foreign funds may remain high thus putting a ceiling on profit growth....These issue increase the risk of the banks rationalizing retail suburban branches further.

- I've seen similar branches sit vacant for 18 months when the bank rationalized 15 years ago. I didn't think the site had a lot going for it if the bank left (it is on a busy road of strip shops). If it was in a more concentrated hub with a fast expanding population, with potential for rezoning to a major satellite centre, that would have made a diff.

- I don't think cg will be flash over the next 5 years at least.

I decided to look at bigger deals. I mentioned some weeks ago a national insurance company wanting to relocate. It would need to be a JV though but I think there's less risk they'll pack up and move within 15 years, plus the site will be cbd or fringe and hopefully attract stronger cg.

At 60% LVR, my trading is doing better.

Streetscape and neighbors.

 

[WinstonWolfe]

p.s.

Sale history
21/10/03 850k
12/06/98 625k
31/03/98 565k Vendor Comm Bank

Unimproved capital value 30/6/10 = 435k.
Lot size 563m2
Building size 301m2.
Return 65k net.
Freehold

 

[Ridin-High]

Right, well we've got a little something on the hook but we're yet to land it. The option but not the obligation if you catch my drift... Interested in people's thoughts as to its attractiveness:

Pros
- 8 years left on the lease to one of the big 4
- CPI+1% annual reviews
- Market review in 3 years time (half way through lease), with a CPI+1% ratchet
- Two five year options, with market reviews - both ratcheted
- Within 10kms of a major capital CBD
- Fronts one of the biggest main roads in this capital city
- Right over the road from an exceptionally large shopping centre
- Around the corner from a major train station
- Tenant pays all outgoings
- Been a bank for twenty years
- Recently fully refurbished
- Within our price range!

Cons
- Was rented at a pretty high rent, courtesy of owner's contribution, in boom times, so now the rent is definitely above market
- So unlikely the market review in 3 years will be fruitful but you never know - at least the ratchets are there
- Strata title
- Old building although it looks new from the front courtesy of the refurbishment
- Structural risk sits with the LL, but insurance is paid for by Tenant
- Car parking spaces are "tight"
- Significant discrepancies between the wording of the Lease and how the relationship actually works - all of which favour the LL - eg direct payment of outgoings by Tenant's PM instead of annual reimbursement as stated in the Lease (hard to value that sort of thing)

With all that the net yield is a touch over 8%. It doesn't scream "bargain" but equally it seems a decent low risk proposition to cut our teeth on this CIP malarkey and actually get funding on decent terms. But it doesn't set the world on fire in terms of upside either so we're a little bit torn - post decisional dissonance is a wonderful thing for the property investor - it always happens to us!

Thoughts?

Hi, Firstly i own no commercial property. But i will give some thoughts on the pro's/con's that you brought up + some more

- If the rent is well above current market rent, you are likely not going to get any value from your up coming market rent reviews. So you might as well act like the first market review doesnt mean anything.

- Your rent will have to remain competitive, below the shopping center across the road, they may relocate to get more pedestrian traffic in the center

- Length of term on lease is good

- Tenant strength is good

- Since the building is strata and old their may be some large up coming costs coming on that front so make sure you have a good look into that

- Their defiantly is a value on the tenant paying the outgoings direct/upfront instead of the end of year re-imbursement. If this changes their is an added cost (could be tens of thousands tied up for months)

8% nett return seems alrite and as you said as long as you can source finance on good terms.

@ Ausprop

Well done on your CIP, you surely understand their is risk in CIP.... i know you have done well....but you have seen most CIP owners have the values slaughtered in the last few years. Thus breaching bank covenants and having to reduce LVR.

@ WW

ANZ might with expanding into asia

I think banks earnings will continue to grow nicely, aus population getting bigger, more people becoming more savvy, burrowing more etc etc etc.

 

[Player]

Hi ya Hi Equity.......just thinking out loud here.

As some contingency forward planning, if the bank relocates in time, being on a main road aside from other retail applications, is there scope for offices (?? zoning) there. Exposure of a main road.....thinking real estate agent, solicitor. Both those residents would find a safe/vault handy.

Not sure how bank leases work, however if zoning allows professional office space type leases are preferable to plain jane retail IMO.

You are also well aware that you have limited value add here by way of exploiting the dirt that it's on. Factor this into your yield and likely capital growth expectations (largely tied to the rental amount).

Being on such a busy road may help re-letting whenever the current guest leaves....exposure and all that. Do the council permits have signage rights to remain if the bank leaves? If it's a corner ?? advertising or has enough height ?? telco tower

They are just some quick ideas that come to mind

Good luck

 

[Ausprop]

@ Ausprop

Well done on your CIP, you surely understand their is risk in CIP.... i know you have done well....but you have seen most CIP owners have the values slaughtered in the last few years. Thus breaching bank covenants and having to reduce LVR.

the guys i know that hold comm are giggling. Where is the slaughter taking place? is it over in the east? In the west the slaughter has been confined to that risky resi stuff which i would never touch - tho the spec builders out at bibra lake building those strata factory units took a bit of a hit from what I have heard

 

[HiEquity]

Thanks for the feedback!

@Dazz: I have seen "better" deals in our price range but only one or two and missed out on them pretty quickly. Nothing I can see now is better but that depends on the tradeoffs one makes - are the strength of the tenant, term of the lease and ratchets worth 1% yield? 2%? Is the lack of land content, upside and strata worth 1% yield the other way? No idea of course and it all depends on the goggles you wear. I view this as a relatively safe proposition that helps to allay some of the fears associated with a new asset class, at a price of course.

An 8%+ net yield doesn't do a lot for me I have to say though - I guess I'm putting this out there to get some idea of the trade offs. Having said that it's an awful lot better than any RIPs I have seen and it is in a good location. For every advantage there is a disadvantage but I am also quite mindful that we've been looking for some time now and it may be better to just take the deal at hand than keep looking for that elusive perfect deal that ticks all the boxes but never actually finds its way into the portfolio. Better to buy something that may not be the absolute best than nothing at all. Not to mention something we can actually get financed... early days but those finance options for this may not be as bad as feared and with the equity coming at RIP rates there should be a reasonable cash flow to start with.

@WW - 8% is also our floor - it's difficult to judge though when a deal only just meets your criteria instead of smashing them, which would be far more preferable! But I'm not complaining!

@ Ausprop - Yes this may not be the best CIP deal ever seen but it sure knocks the socks off our RIP options at this stage...

@ R-H - The building is single story and just brick walls and a roof - dead simple. Hopefully the structural inspection will pick up any issues nevertheless.

@ Player - Due to the strata title and small land content none of those opportunities you mention are really available. The tenant has full signage rights, for example. The zoning allows both offices or shops (or a bank!) but the layout would only really suit a shop. Of course, while the lease on a shop may not be so attractive, the lower yields the property could revert to as a result do provide some upside...

 

[WinstonWolfe]

HE, the bank we looked at averaged 6.34% growth from 98 to 03.

Current net yield is 65k pa = $215/m2.
The top market yield for similar properties was about 8.5% (6.5-7 for cbd)
Value at 8% is 812k. It sold in 2003 for 850k!!!

Based on my research of similar sites, I calculated max potential net yield at $265/m2 = 80k pa, 8% ~$1m.
How yield got 20% under market value was a deal breaker. Maybe my market research sucked, or it is a cr@p lease for the owner. Anyway, there was another 4 years on it despite a market review late next year.

It was auctioned in June, but I didn't go cos lost interest. I am still waiting for the auction result to come on RPData.

If China kicks along at 9%+ gdp growth pa, then maybe you'll do better than I'd done in Brissy. Commercial here is comatose imho.

 

[Ridin-High]

the guys i know that hold comm are giggling. Where is the slaughter taking place? is it over in the east? In the west the slaughter has been confined to that risky resi stuff which i would never touch - tho the spec builders out at bibra lake building those strata factory units took a bit of a hit from what I have heard

thats because your in WA, was reading in paper a few months back someone saying industrial property over in those parts is set to do well.

Alot of Aus REITS have had the values of their propertys slashed recently. These guys ain't barry from across the road who has an industrial property in the local area.

It's all risk vs return.

If you have quality commercial property, you are cheering

Regards

RH

 

[Ridin-High]

ever considered shares for yield or if you specifically want exposure to aus comm property, a REIT or index tracker of ASX 200 REITS

Regards,

RH