Commercial Investment

Just curious to find out other people's opinions on investing in commercial properties.

I am looking at purchasing a commercial freehold shop "off the Plan" in a bluechip beachfront location with a view to either
a) setting up my own restaurant upon completion
b) leasing out the premises for 3-5yrs, then setting up my own restaurant.

Settlement isn't due until feb/march 04. 94 out of 95 of the units in this complex have sold. Only require 5% Deposit/bank guarantee. Estimated rental return is 10%. Selling for $5500 per sq.


BUNDY
 
hey bundy

sounds great.

i always thought you need more down with Commerical , say at least 25%+.

i have a few friends that have com - i have found that the risk factor maybe be higher than residential but at the same time it can be very good espically if you have a good tenant that will be there for many years.

good luck..
A
 
Hey Bundy,

Acknowleging that
94 out of 95 of the units in this complex have sold.
means that you won't want to divulge too much at the moment, however, after you decide one way or the other, can you post some more details about location/developer. It sounds an interesting way to dip the toes into commercial property.

Let us know which way you jump, and what influenced your decision. If you can share how you've done your due dilligence I'd be very interested.

Good luck!
Luke
 
Hi Bundy

I've had an ex bank building for six years. It is a stand alone building, built boundary to boundary on the title, no common walls with any other building. Front entrance to the main street, rear entrance to railway land. No car park spaces, the tenant uses the railway land at the rear.

Because it was built for a building society, it has two ensuite WC inside the building plus a staff kitchen area, and the premises are fully secure.

When we bought it there was a fairly high vacancy rate amongst the 108 shops in the strip. Vacancy rates now are very low, and fill quickly.

For the first two - three years there was no capital growth, and rents were very competitive ie low rents but high returns, around 14% per annum. Because rents tend to be leases, rents are slow to change, therefore the rental amounts stay the same but fluctuate % wise against capital value. Rents are now around 6.5 - 7% against capital, which means that the value of our property has just about doubled plus a bit. This represents compounding growth over the six years of approx 16% per annum.

The freehold nature of the property means no body corporate. The tenant can, within council guidelines, do as they wish in terms of colour, presentation and use of the building.

So can we. At a later date I intend to build a second storey, for either retail, office or residential use.

Bundy, although we have never had a vacancy, some of the other shops have experienced more than twelve months without tenants. Some of the older shops have had to be completely rehabilitated (I use the word deliberately) before they could be let. Others, in terrible condition, loos in the back yard or none at all, no kitchens etc, have long standing tenants who could not tolerate the disruption to business that refurbishment would necessitate.

However, residential properties come and go. I consider the bank to be the Jewel in the Crown, even though we can only ever use 60% of its equity due to lending restrictions on commercial properties by our preferred bank.

Would I buy another retail premises? I was looking at another one this week, however the arcade it is part of has always had high vacancy rates, short term tenants, problems with vandalism, and an obstropolous body corporate committee, full of wacky ideas which involve spending lots of money on how to attract more customers to the arcade.

The shop for sale appeared to be cheap at $59,950, but on closer examination the tenant had not signed a new lease, which means that technically the shop is vacant, thus any rent is hypothetical. I pointed out to the selling agent that the previous lease did not include outgoings by the tenant, therefore, based on the figures provided, the rent was only two thirds of the advertised income and for commercial property I would expect 8 - 10% return, especially in such a high risk area. I then offered $40,000 and he angrily replied that the owner had already received offers of $55 and $58,000 but 'wouldn't sell for less than the full asking price'. Yoh.

Bundy, I operated my own business in my shop for the first two years. I think your plan of renting it out first is a better idea. It gives the development time to settle in, and for the first rush of businesses to come and go. A harsh economic fact of life. However, if you get a quality tenant they may require 3 x 3 x 3 lease which may mean you will have to defer your dream of running your own restaurant for a while yet - at least, in that location.

By the way, a local hot bread shop spent more than $105,000 in outfitting a 90msq shop, and within a year an existing bakery three doors down and with twice the floor space became available. The baker, a canny fellow, immediately took the larger premises, walked away from his outfitting and sub-let the smaller shop to a discount book store. Setting up the business of a restaurant is not a cheap exercise.

Keep in mind that the sale of the property you are looking at may only require 5% deposit now, but it's the balance which requires financing. Most lenders will only do the 60% ratio, but of course there's always the cross-collateralisation path to realising our dreams.

Good luck - you seem to have a penchant for beachfront - perhaps you are a reincarnated mermaid?

Cheers

Kristine
 
Thanks very much Kristine and everyone for your input.

Beachfront and beachside has been very good to me:)

Yes, I agree, the best scenario would be to rent it out on a 3 x 3 year lease, then decide If i want to enter into a business.

Hopefully by then, I will be in a position to retire, not worrying about a business. The rate beachside residential and commercial properties are going in SEQ, it looks likely to have gained 10% in equity by settlement.

I will keep you all informed, meeting with the developer later in the week to look over the contract.

BUNDY
 
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