Calculating yield based value on commercial property?

[Noodle]

Hi All,

Curious how fellow somersoftians use the yield (as opposed to comparable sales) to calculate the value of a commercial property?

Helping a friend out who is looking to use his inheritance to buy outright a decent mixed used commercial property which is due to go to auction soon.

The property returns around 9% based on guide price and has a very good tenant on a long lease and some additional resi above it.

On paper looks like a good deal, but not having much experience with commercial so we're struggling a little bit assessing fair value.

Any help much appreciated.

Noodle

P.s. Heard on the grapevine a rumour about no stamp duty for the transfer of commercial in to SMSF, is this true?

 

[one world]

Without a doubt, this forum's resident expert on CIP will be Dazz.

If Fischer Black and Myron Scholes (the latter won a Nobel Prize) couldn't get it right in the financial markets, what hope is there for the rest of us in CIP?

Personally, I say: let's put value ahead of yield?!! Subject to location of course.

If you advised us about the location, it may be easier to for us to share our mis/informed views.

The property returns around 9% based on guide price a

Is this 9% after ALL costs and taxes?

As for the good tenant, is the lease secured against his own name, rather than his company? They usually pay rent more fastidiously if they know they may lose their own home if they fail.

You need to be wary. Even solid tenants like Banks sometimes leave after a 5 plus 5 lease.
What is the contingency plan when that happens?

Dazz, where are you?

 

[Noodle]

Without a doubt, this forum's resident expert on CIP will be Dazz.

If Fischer Black and Myron Scholes (the latter won a Nobel Prize) couldn't get it right in the financial markets, what hope is there for the rest of us in CIP?

Personally, I say: let's put value ahead of yield?!! Subject to location of course.

If you advised us about the location, it may be easier to for us to share our mis/informed views.



Is this 9% after ALL costs and taxes?

As for the good tenant, is the lease secured against his own name, rather than his company? They usually pay rent more fastidiously if they know they may lose their own home if they fail.

You need to be wary. Even solid tenants like Banks sometimes leave after a 5 plus 5 lease.
What is the contingency plan when that happens?

Dazz, where are you?

Thanks One World

Net is around 8.5% most outgoing covered by tenant and yes lease is against his personal name. Taxes will be minimised as will be in SMSF and pension phase.

Will happily share location once he's bought it, I understand this doesn't help right now but we're talking a fair chunk of change at risk. I'm more after general advice on yield based valuations.

 

[Scott No Mates]

CIP valuations are based primarily on net yield. As the property is mixed used, then the waters are muddied substantially.

Is the unit separately leased or part of the same occupancy?

Say, the CIP is a shop with resi over, then the resi component would be valued similar to a unit by direct comparison (eg on a main road, 1st floor, # bedrooms/bathroom, separate access, parking etc). The shop would then be valued on yield - though your DD will reveal if this is a market rental (or above/below).

 

[Aaron_C]

With a mixed use type of CIP - there will be retail, offices, some resi etc. Each individual shop/office has to be valued individually by their own unique capitalisation rate etc to get the total value. A gross 9% yield is meaningless.

 

[Noodle]

Thanks guys. The resi component is rented out separately to individual tenants and relatively easy to value on a like for like basis, it is the commercial part I'd like to apply the yield based valuation on. The commercial part is one tenant and one business if that helps.

 

[Scott No Mates]

for the commercial premises, you are buying the freehold only not the business. Depending upon the usage & covenant of the tenants net yield may be between 2-7%.

If your friend is seriously considering the property, then his dd should include engaging a valuer for guidance on price that should be paid.

 

[SB25]

My opinion only -

Whatever happens, it might best to not let your friend come across as cashed up and naive to the agent. Anything can happen on Auction day and by the sounds of it your friend is cashed up and flying blind.

Second the advice to engage a valuer and I would also suggest engaging a commercial property solicitor to review the leases and the securities, might even be worth doing a credit history check if they are in personal names.

Suggest your friend checks all building/fire reports, the original development approval if it's recent, that the onsite (and on title) carparking is adequate, and any prospective encumbrances, particularly if it's next to a public utility (substation, main road, water pumping station etc). The last thing your friend wants is a building compliance or access issue popping up after settlement.

A good valuer and DPO should be able to do most of the above.

 

[Scott No Mates]

An astute property solicitor isn't necessarily the best to advise on the commerciality of the lease which is in place - they can advise if the lease is valid, weighted in your favour and water tight but not whether the clauses are workable/at commercial rates.

 

[SB25]

they can advise if the lease is valid, weighted in your favour and water tight

Scott we're in agreeance - that's what I meant by having a solicitor review the leases and securities

 

[John M]

Curious how fellow somersoftians use the yield (as opposed to comparable sales) to calculate the value of a commercial property?

I would not recommend solely using the rent to calculate the value of a property. Some people buy properties based on the rent even if it is above market value as they think they are buying a 'cash flow'. I don't believe in this, as I believe at the end of the day if the tenant goes belly up, the property is only worth the same rate as its neighbouring properties. Therefore, you are not buying "cash flow" when you buy an investment, you are buying bricks and mortar which happens to have a tenant paying nice rent.

Therefore, it should be valued based on comparable sales - the rent is there to provide cash flow which allows you to hold the property/pay it off, but you should not buy it solely based on what rent it brings in.

I hope this makes sense..