CIP Cycles
- Thread starter MTR
- Start date
CBD office space is a completely different cycle to industrial property, which is different to retail, which is different to agricultural, which is different to medical, which is different to banks, etc etc etc. And all the different cities are operating on different cycles with different economic conditions, land availability and construction methods and costs.
The macro view is just not very helpful when you want to buy an individual office / warehouse near the airport in Sydney. It gets swamped by other things such as the particular demand / supply outlook for that product in that market, the quality of the tenant in question and the strength of the lease to that tenant, including the strength of the guarantees in place etc.
But if you like this sort of thing the reports put out by the major cip agents on their individual markets (eg Perth office space) are worth a read to get some idea of what is going on. But after that you just have to get out there and talk to people...
The macro view is just not very helpful when you want to buy an individual office / warehouse near the airport in Sydney. It gets swamped by other things such as the particular demand / supply outlook for that product in that market, the quality of the tenant in question and the strength of the lease to that tenant, including the strength of the guarantees in place etc.
But if you like this sort of thing the reports put out by the major cip agents on their individual markets (eg Perth office space) are worth a read to get some idea of what is going on. But after that you just have to get out there and talk to people...
Or purchase some of the 'paid' research material from the bigger agencies. In most cases, unless you are spending $10M+, the cycles will mean little to the investment timeframe unless you are buying midway or later through the upswing or from the peak down to similar levels.
Other places which have this sort of research for each sector include the Australian Property Institute.
For the right sites, people are paying big numbers. Numbers are looking likely to go bigger irrespective of yield because of the fall in AUD. Chinese and Malaysian investors are scouring Australia CBDs again to bid on sizeable freeholds (ie $3m+) - but more so in Sydney and Melbourne.
As always, tightly held locations will command large premiums and will probably do so more often in the foreseeable future. How often do you see a good shop sell on something like St Georges Terrace? Probably once every 5 years?
Lastly, yield is not a concern in many places in prime sites. To give an example, we have sites that rent for around 3% of market value in the CBD. If we invested a million or two in to it to refit it, I could jack the return on (market value + renovation cost) to around 15-25% by converting them in to multiple shops, building extra floors for office/seminar/mini shopping centres, opening up arcades etc etc. Of course at that point the market value would actually be a lot more than "current market value + renovation cost", as it'd sell at a 4-5% cap rate again.
So you ask why don't I do that? Because these sites are priceless when they have no leases and nothing on them. One day someone could offer you $Xm. It could be worth 30% more to someone else on the next day. The optionality is priceless. All that extra rent is worth nothing if the next guy has to knock it all down in order to get the foundations in for his 60 storey tower any way.
It's like this kid who paid $40m to buy a site for development. He bought it at the cap rate and there were 6-7 floors of car parks, probably 20 shops, 4 floors of offices etc. For him to build his tower, he has to knock all that down. But obviously he doesn't think about that because he was 27 at the time.
