Commercial IP in Industrial Park

I am breaking my own rule by asking this type of question, but here goes.

Looking at CIP for a little time now, and have decided that at least for Melb metro (inner suburbs) retail commercial property is at a yield that doesn't enthuse and the price point is generally $1m+. I have generally not looked at outer suburbs.

I have come across an office/warehouse located in an industrial park in Port Melbourne - there are a few I admit being built in and around that area of Port Melbourne. It is 5 years old. The property is a semi-attached 2 level office/warehouse (209 sqm in total plus 3 car spaces). The owner of the business is selling due to a divorce and is offering to sign a 5 x 5 lease upon settlement which based on the current asking price is a 7.3% yield. The business itself is well established (11 years) and has a good reputation in the industry it operates in from what I have been able to find out.

Because of the price point, the property is 'in play' from a finance perspective. However, my thoughts about these industrial parks is that they may be a bit like the commercial property equivalent of near new apartments in high rise apartment blocks. There are a few vacancies in the same park being offered for both sale and lease. The size of the park is ~30,000 sqm, has office suites, office terraces and office/warehouses of sizes up to 330sqm.

What are people's thoughts around investing in industrial park?
 
Buzz,

We just bought our first CIP - see my thread in this section. It sounds like we were shopping in ballpark same price range.

As part of the year+ long research, analysis (paralysis), and searching process we briefly looked at this sort of property (both in Port Melb and other office/warehouse properties in the Melb metro area). We discarded this idea and focused in on retail CIPs.

Observations:

- These properties have a very low $/sqm rent

- They are very large in size (sqm) compared to (prime/near-prime) retail CIPs of similar price

- They have a low land value (strata or semi-detached freehold) usually being double story say 200 - 400sqm on small blocks compared to purchase price. Lots of depreciation but rental increases would be lucky to match inflation and cap growth would follow unless you can get cap rate re-rating

- Very low tenant "stickyness" despite lease. One small "park" of around 10 office/warehouses we looked at in Cheltenham must have had 1 or 2 tenant changes for each of the 10 over the last 6 or so years since they had been built. Why? No goodwill associated with venue, crappy tenants (2nd tier or startups), easy for them to move to a lower $/sqm location at option expiry as opposed to retail or pure professional services office.

- Yield isnt that much higher than retail (and at 7.3% it doesnt seem that you're getting a particularly cheap deal unless rent is below market). You can easily get in the 6 - 6.5% passing yield range for retail if you push and shop around. I stumbled across a deal which had sold under distressed circumstances btw for a near-prime retail which sold a tad above $800k for 7.0% passing yield on a solid lease for a decent 130m2 retail premises. These do come up esp if you start offering low amounts first up and move upwards as they move down.

The other thing I decided on my CIP was any purchase had to be the sort of building I'd be happy to buy/own if it happened to be vacant. That way the lease becomes secondary, and only affects values for its duration. I worry that unless you get the property below for well under market its value is quite tied to the lease considering the vacancies for sale and lease around.

Just my 2c.
 
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al services office.

- Yield isnt that much higher than retail (and at 7.3% it doesnt seem that you're getting a particularly cheap deal unless rent is below market). You can easily get in the 6 - 6.5% passing yield range for retail if you push and shop around.

Trogdor,

Elementary question here, is ''passing yield'' the net yield at the current rent (not taking into consideration whether current market rents are higher or lower) ??

Thanks.
 
one thing I would watch out for is how stable is the vendor seen as he just split up, he may sign a contract then he breaks down and the business turns to crap.

thats only my thoughts but you would need to get a good solid bond or bank deposit
 
Trogdor,

Elementary question here, is ''passing yield'' the net yield at the current rent (not taking into consideration whether current market rents are higher or lower) ??

Thanks.

Correct.

To be honest its not that useful a measure for valuation, but is useful for calculating your cashflow in the short term.

For valuation better to use a tight range of what you think are "market" rents, and a tight range of what you feel to be recent cap rates for sales.

That gives you a bigger range of possible values.

Then if passing rent is greater or less than market rent you would adjust valuation by an overage amount (or subtract) using sensible discount rate and probability of lease renewals.

You can put this all in Excel and run some Data Tables to change two variables simultaneously to observe how the value of the property changes.
 
The other thing JIT is that you will often find "market" rents to be quite a broad range as no two properties, uses, and other lease conditions (lease duration, options, review mechanisms, etc...) all go to rent (i.e. one party may concede a few $/sqm or sometimes much more for each of those factors if they feel strongly.

A neighbouring property of same characteristics may end up with quite a different rent and different terms.
 
Correct.

To be honest its not that useful a measure for valuation, but is useful for calculating your cashflow in the short term.

For valuation better to use a tight range of what you think are "market" rents, and a tight range of what you feel to be recent cap rates for sales.

That gives you a bigger range of possible values.

Then if passing rent is greater or less than market rent you would adjust valuation by an overage amount (or subtract) using sensible discount rate and probability of lease renewals.

You can put this all in Excel and run some Data Tables to change two variables simultaneously to observe how the value of the property changes.

Great, thanks for the clarification on that term and your process here.
 
The other thing JIT is that you will often find "market" rents to be quite a broad range as no two properties, uses, and other lease conditions (lease duration, options, review mechanisms, etc...) all go to rent (i.e. one party may concede a few $/sqm or sometimes much more for each of those factors if they feel strongly.

A neighbouring property of same characteristics may end up with quite a different rent and different terms.

Yes, not sure how you deal with this though?

I know Chris Lang has his own checklist and points system for selecting property...

The difficulty in precise valuation probably opens up opportunities though for those who can using a combination of some sort of system/process/method, foresight and intuition...
 
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