CIP Risks & Rewards

[redwing]

I'll always miss Dazz and his contributions as this is his arena, however i've oft contemplated CIP Risks & Rewards after having discussions with an in-law/out-law who had moved on from RIP to CIP and seeing CIP risks like the Bunnings complex in Joondalup WA still being empty after many, many months as they have shifted location

What about the "now" empty building

The fundamental driver for commercial property growth is similar to the residential market ? it's supply vs demand. However, commercial demand is driven by economic factors as well as population growth

There's a great post here on commercial property

 

[Scott No Mates]

The inherent risks of commercial property are substantially different from those encountered with resi.

Why do all too many articles focus on the quality of the leasee (government or public company) vs pty ltd, partnership or sole trader? (Investment returns are generally lower and entry price higher for stronger covenants but there is the perception of lower risk). You can still have an under performing CIP/asset by having a poor understanding of your investment. Paying a premium to buy a property with the low risk tenant, poor lease conditions, below cost rent reviews
all contribute to making this your worst investment decision.

Conversely you can have a gold mine. Buying with vp, undertaking capital works, rezoning, securing the right tenant, offering the right incentives, having the appropriate lease in place all contribute to a higher capitalisation rate.

A couple of other things to consider: the number of small business tenants far outweighs the number of listed companies or government agencies; as a % of all businesses the number of failures is very low overall; most businesses fail in the first few years of establishment. So picking a decent tenant means understanding the business.

 

[INVSTOR]

I grew up vagually surrounded by commercial property investing as my mum's family invested in it. I guess the investing was mainly run by my uncle and grandfather. Having 4 or 5 lessened the risk of vacancy. I think they were quite lazy/passive with their investments.
One property was a successful auto electricians. So they owned the business and the building. When the head mechanic retired they didn't bother to replace him or sell the business. The neighbouring business was running out of room so the rented the building to them for a while and then later sold it to them.

They also owned a commercial property which they developed directly across the road. I remember being fascinated as a child by the little model building. I think this building was designed inappropriately as it was often vacant. My employer as a teenager took a look at it and didn't choose to rent it as the office area was too large and trucks would need to reverse out rather than be able to drive out of driveway forwards.
Eventually when they did secure a tenant, it ended up being rented to a company that my husband's friend worked for. He was bragging to me that his company was renting out half of the building to another company that was almost covering all of their company's rent. I feel that if my mums family was more aggressive with their investments and dividing that building into two it would have been far more successful. This was the last building they sold off about 16 years ago.
Another building they had but sold (wah!) had the same tenant and fully occupied and an established business/tenant for about past 40 years. They are still there now as a tenant. I only found out they owned the building after I went for a job interview with the business. They also the building next door. I think that may have been all the buildings they owned. My parents believed you shouldn't discuss business/money with kids.
Their is definitely good and bad investments in the commercial property world and a lot of DD needs to be done before commiting to make it a successful investment that attracts great tenants and avoids high vacancy.

 

[Scott No Mates]

Similar theories can apply with commercial as with residential) - location, location, location. But they are not the same.

Resi you want the tree lined street, schools, transport, shops, facilities etc whereas in commercial you want the exposure, transport, main roads, affinities with other businesses (comparative shopping or complementary shopping eg. smash repairers located near auto wreckers/tow trucks/recyclers or handbag store near dress shops/shoe stores).

Many businesses prefer to use their capital in their business and choose to rent - they will pay to stay in their preferred location (good will) or are poor asset managers and will stay in a location out of laziness/high relocation cost/discounted rent etc without considering suitability of the building to their current/changing needs hence very long term tenants.