Cheap CBD floor plate

Hi there,

How about this one...

http://www.realcommercial.com.au/cg...er=&cc=&c=92322379&s=vic&snf=as&tm=1252743038

A Melbourne CBD office building whole floor level fully leased on a new 5X5 lease...

Sounds good for just $620k... that's FHOB price territory! (unless it's a mistake and they actually mean $6.2MM?!)

But a poor yield of 5.65% pa, and not sure if this is gross or net?

And not sure who the tenant is? ... could be the Mafia :D.

And also not sure what ''new lease'' means, ie. what year exactly did it start?

It's 154m2, so ?maybe a small floor plate... which would possibly mean a skinny looking building?!

I haven't been to the CBD much recently, but my vague re-collection is that the corner of Russell and Bourke isn't the nicest part of the city.

Not sure if you'd call it "B" grade CBD office space... or maybe even "D" grade?!

What's the rental/m2 for this kind of office space?

What do you think?

I thought getting a bit of CIP discussion flowing around real life examples of what's on sale now may help the learning process here...
 
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Dazz is your man but consider:

1. Check body/corp fees 1st- does lease allow them to be passed to tenant.
2. Value/price is usually determined by a return on what the market rental is per square meter.
3. solvency and viability of tenant is vital.
4. Is there a rental bond and/or director's guarantees?
Check body corp minutes- never know what you will find.
5.Get a corporate lawyer specializing in leases to review the current lease.
6. Ask why they are selling?

Well thats a start I suppose now I'm off to bed.
 
With a floor plate of only 154sqm it sounds like a D grade building to me.

It works out at almost $4,000 per sqm which does not sound cheap for old small plate office space.

The rent works out to be $227 per sqm which is the net rent one would expect from a C/low B grade building (($620k * 5.65%) / 154sqm).

Remember the lease is less than 5 years.

The tenant has the option, but not the obligation to renew for a further 5 year term.

Given that your borrowing costs will be higher than 5.65%, thus cashflow negative, and there is a looming oversupply of office accommodation in Melbourne where do you think the capital growth will come from??

A 40% increase in rent over 5 years (8% pa cap growth ... so less than a 7% pa return - after loss on interest payment, on a simple interest calculation) will take the rent to $317 per sqm .. just below some of the current rents for A grade buildings in Melbourne.

But if you think it is a good deal then go for it.

cheers

RightValue

PS: That's if we are talking net rents .. if it's gross take off at least $30persqm from the income for expenses.
 
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Can it be reno'd and converted to 2 or 3 apartments??
even if with reno costs (kitchens and bathrooms) bring it in at 800-900K
I would have thought 300K for an inner city apartment is an Ok price?? (I know zip about Melbourne :) )


Gosh!! I just had a look at realestate.com.au Carve it up to 4 or 5 studios!! worth ~160K rent ~220p/w each
 
It works out at almost $4,000 per sqm which does not sound cheap for old small plate office space.

The rent works out to be $227 per sqm which is the net rent one would expect from a C/low B grade building (($620k * 5.65%) / 154sqm).


RightValue,

To get comparable sale price/m2 and rent/m2 data, is their a specific website where you can access this or pay for it?

Or is it a matter of ringing a few commercial property agents and asking them for this information?

Thanks.
 
In addition to the above,

I would also ring comm agents in that area (at least three or four) and get an idea of cap rates. Take an average and verify everything yourself. Also look at what lease rates are in that CBD area for similar types of assets and what they go for per sq m.

www.realcommercial.com.au

www.commercialrealestate.com.au

Those sites may help as a start, although you're already familiar with them.

Sounds like a very low yield to me. Unless there are some hefty (lease documented) rent rises to come and the rental figure quoted was a sweetheart (to entice the tenant), then the higher rents in future may (depending on current and prevailing cap rates) give you cap growth.

In the instance that the initial rent was low to entice the tenant.....one must then wonder what calibre of tenant this is in the first instance. A bank guarantee would be preferable IMHO to any Co or personal guarantees, that are backed by two dollar corporations as trustees or an asset-less individual.
 
RightValue,

To get comparable sale price/m2 and rent/m2 data, is their a specific website where you can access this or pay for it?

Or is it a matter of ringing a few commercial property agents and asking them for this information?

Thanks.

I am not too sure where you would get the info from. Valuers have their own sources .. and I don't do commercial these days, but my last post gave you an indication of what market rates are for the different grades... but things vary such as location, age etc..

In reality the best bet would be to get a valuation done on the property. That report will tell you the grade of the property, the market rental and the relevant capitalisation rate. It should also have $/per sqm rates as well.

Floor plates of this size are keenly sought after by owner occupiers - and small investors - who pay very high prices because it is "affordable".

As I mentioned in my last post, and I will make it plainer now.

Where do you think the capital growth will come from in this cashflow negative investment? In commercial property that is bought/valued only on it's cashflow, you only make money if rents increase and/or if capitalisation rates decrease. How much lower can a yield (cap rate) go on this property?

How much rental growth can there be with a looming oversupply of commercial property?

Act in haste, repent at leisure.

good luck,


RightValue

PS: Why not look at some suburban Industrial property?
 
Sounds like a very low yield to me. Unless there are some hefty (lease documented) rent rises to come and the rental figure quoted was a sweetheart (to entice the tenant), then the higher rents in future may (depending on current and prevailing cap rates) give you cap growth.

...

In the instance that the initial rent was low to entice the tenant.....one must then wonder what calibre of tenant this is in the first instance. A bank guarantee would be preferable IMHO to any Co or personal guarantees, that are backed by two dollar corporations as trustees or an asset-less individual.

Good points Player, makes sense.
 
Valuers have their own sources ..

Do you mean that you have to be a valuer to access these, a bit like residential sales databases?

RightValue said:
In reality the best bet would be to get a valuation done on the property. That report will tell you the grade of the property, the market rental and the relevant capitalisation rate. It should also have $/per sqm rates as well.

True, but I'm very reluctant to outsource valuation completely. Maybe as a learning exercise I may though for a few potential properties. But I'd like to be able to confidently place a value on a CIP myself. That's the enjoyable part for me and one which I'd like to have some control over... maybe I should become a valuer!!

RightValue said:
Where do you think the capital growth will come from in this cashflow negative investment? In commercial property that is bought/valued only on it's cashflow, you only make money if rents increase and/or if capitalisation rates decrease. How much lower can a yield (cap rate) go on this property?

How much rental growth can there be with a looming oversupply of commercial property?

Yes, I do see what you're saying... the cap rate is low as it is and the scope for further increases and thus capital growth is probably limited...

This particular property is not something I am actually considering purchasing, just thought it would be interesting to discuss.
 
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http://www.realcommercial.com.au/cg...er=&cc=&c=29326039&s=vic&snf=as&tm=1252934772


At 8.66% p.a. nett yield, on over half an acre of green titled dirt, perhaps this might be worth a second look in your rough pricing ballpark.


Asking price of $ 880K, and the Tenant pays you $ 1,466 p.w. and picks up all of your rates / water rates / insurances / land taxes on top of that.


Don't know the area / don't know the Tenant / don't know anything at all really !!!


It's been over 3 years since you and I first spoke of owning stuff like this. When are you going to stop talking about it ?? You'll never learn to swim by walking up and down the sidelines asking what it's like in the water. Jump in and get your toes wet.


Have fun JIT analysing.
 
http://www.realcommercial.com.au/cg...er=&cc=&c=29326039&s=vic&snf=as&tm=1252934772


At 8.66% p.a. nett yield, on over half an acre of green titled dirt, perhaps this might be worth a second look in your rough pricing ballpark.


Asking price of $ 880K, and the Tenant pays you $ 1,466 p.w. and picks up all of your rates / water rates / insurances / land taxes on top of that.


Don't know the area / don't know the Tenant / don't know anything at all really !!!


It's been over 3 years since you and I first spoke of owning stuff like this. When are you going to stop talking about it ?? You'll never learn to swim by walking up and down the sidelines asking what it's like in the water. Jump in and get your toes wet.


Have fun JIT analysing.

Dazz,

Thanks, I'll analyse that one tommorrow morning!

I know it seems like I've been talking about this for ages and not taking any action, but that's just because I plan things well ahead of time.

The thing is, 3 years ago I was 26 y/o with 1 X RIP to my name at the pricely sum of $361k at 97% LVR... and was backpacking through South America for several months soon after to celebrate!

Phase 1 of my financial strategy back then was 5 RIPs within 5 years, gross value $2MM-$3MM (broadly speaking), and that has now been achieved.

In the next 6-12 months my income and equity levels will likely allow me to start purchasing CIPs, and start "phase 2" of my financial strategy.

You have to walk before you can run (or swim :))... that's what I reckon anyway.
 
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Do you mean that you have to be a valuer to access these, a bit like residential sales databases?

Yes commercial valuation firms all keep their own database.

Industry sales databases don't necessarily have the relevant lease details that are essential for analysing commercial sales


. maybe I should become a valuer!!



s.

go for it.

Just a 3 to 4 year University course, then 2 plus years spent as a cadet/assisstant valuer and a tough professional interview and you are there.

cheers

RightValue
 
Yes commercial valuation firms all keep their own database.

Industry sales databases don't necessarily have the relevant lease details that are essential for analysing commercial sales

Then how do you get these details... buy speaking to the listing agents?

Re. becoming a valuer, I'm sure it takes lots of training, but I can't fathom becoming a CIP investor and not having a pretty good idea of how to value a property.

Valuation, along with property selection and understanding leases would appear to be key aspects of the job (though I would always use a comm prop lawyer to review leases in detail after my initial perusal if I was to proceed further).
 
Then how do you get these details... buy speaking to the listing agents?

Yep, that's what valuers do, or they swap information with other valuers.

This is one of the reasons why Commercial valuations cost so much... a lot of time is spent gathering info and analyzing it.

Rbut I can't fathom becoming a CIP investor and not having a pretty good idea of how to value a property.

Good idea but it doesn't stop many people .. I have seen examples of retail properties leased at full market rents selling on sub 3% yields!

I have been thinking of running a couple of courses on how to value property for quite a while .. I may well have to move from thought to action one of these days ... but it's hard to fit in the action time around the 7+ houses I value every day.

cheers

RightValue
 
Yep, that's what valuers do, or they swap information with other valuers.
This is one of the reasons why Commercial valuations cost so much... a lot of time is spent gathering info and analyzing it.

This sounds like an opportunity for an RPData/PDSLive-type organisation to get involved in and selling access to?
 
I have been thinking of running a couple of courses on how to value property for quite a while .. I may well have to move from thought to action one of these days ... but it's hard to fit in the action time around the 7+ houses I value every day.

cheers

RightValue

That would certainly be useful for CIP investors, I'm not sure whether there's any courses out there directed at an investor level rather than for industry professionals...

Just another question on this RightValue...

What is the ''summation method'' of valuation and did you routinely use it in your commercial valuations in the past?

Is it land value + construction cost + ... ?

What about if the property is tenanted?

Thanks.
 
Just another question on this RightValue...

What is the ''summation method'' of valuation and did you routinely use it in your commercial valuations in the past?

Is it land value + construction cost + ... ?


Thanks.

Yes it is .. kind of

But rarely any relation to market value in commercial property (commercial property is generally bought for the income stream) where you put market value for the land and add that to the cost of construction.

However if you add underlying occupied and developed land value to the added value (not cost) of the improvements then you generally get market value... this is used all the time in residential valuation - and is a very good method for residential but not so applicable in Commercial - .. stands up well in court.

The main 3 methods of valuing commercial property are Capitalising of income, rate per sqm (espesially for owner occupied small stuff like this floor plate) and Discounted Cash Flow (what I call garbage in garbage out).

Generally you use at least two mehods and adpot the most applicable.

cheers

RightValue
 
The main 3 methods of valuing commercial property are Capitalising of income, rate per sqm (espesially for owner occupied small stuff like this floor plate) and Discounted Cash Flow (what I call garbage in garbage out).

Thanks, I have a basic understanding of the first two, which is what I will probably stick to.

In simple terms how does the discounted cash flow method work... ?
 
Thanks, I have a basic understanding of the first two, which is what I will probably stick to.

In simple terms how does the discounted cash flow method work... ?

It is the present value of a series of projected income streams - (usually 10 years) discounted at an appropriate hurdle rate/rate of return/weighted average cost of capital/etc; with the final years income stream capitalised.

Basically it is a huge spreadsheet making lots of assumptions over a long period of time .. hence I call it garbage in garbage out .. favoured by the institutional buyers/investors.

cheers

RightValue
 
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