commercial vs residential

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From: Louie Langov


Have been tossing up between commercial and residential, seems to be a great return in comm. compared to residential. There are risks though, but would be interested in people's views of the next growth areas in commercial property's, I will suggest one Sutherland, anyone agree?
 
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Reply: 1
From: Mike .


Hi Louie,

Sorry, I have no knowledge of the commercial property market, so can't answer. I'd like to field another question, though. When we invest we seek a return that will compensate for the inherent risks in the investment. By minimising or eliminating those risks we are maximising our return. When comparing two different investment options the one with a higher return is usually perceived as the riskier choice. WRT residential v commercial, commercial has the better return. My question is: since the returns of commercial are close to those of shares, isn't shares the better option for reasons of liquidity, debt management, and cyclical advantages?

Also a famous maxim in investing is: "Don't invest in something you know nothing about." Since there is very little info out there on commercial property but bucketloads of info about the sharemarket and companies, I think, for similar returns, share investing is less riskier than commercial property. Buying a commercial prop would be a big debt burden all at once, however, I can increment the size of the debt with shares. What do others think viz-a-viz commercial property versus shares?

Regards, Mike
 
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Reply: 1.1
From: Kristine .


Hi Louie and Mike

I know nothing about shares so no opinion for that part of your question, Mike.

As for commercial property, spot on with your reminder that rate of return is direct 'reward for risk'.

The main risks with commercial are:
vacancy - can go months YEARS without a tenant.
Building obsolescence is a very real factor in commercial/industrial. Who would rent a shop/office/factory without decent heating/cooling/ventilation/fire system/etc
commercial has a long slow financial swell, and the undertow when the tide goes out can be fierce.

If you are buying to hold, and hold, and hold (your grandchildren will remember you fondly), then commercial can be good - for the Banks, Insurance Companies, Managed Funds, Superannuation Trusts etc. For the small investor borrowing with only 60% allowed as equity and with perhaps only 15 years to repay, are you prepared to invest that much of your own money? A commercial investment gives whole new meaning to the term 'negative gearing'!

Don't be dazzled, Louie. For the investment burden of even a modest commercial venture, you could gear - perhaps positively - two or three residential investments.

Enjoy the adventure of exploration!

Kristine

PS Mike - sorry, can't help myself - this is the 3rd post today!
 
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Sim

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Reply: 1.2
From: Sim' Hampel


Hi Mike,

Just a comment regarding shares.

You suggest that shares would be a better option for investment because people understand shares.

I disagree. If you ask people how shares work and how to make money on them, most will answer: "It's easy, just buy when the price goes down and sell when the price goes up, you can't lose !".

To me this shows a fundamental misunderstanding as to WHY share prices move like they do. Buying with such a lack of understanding, especially when backed with "it's okay, if they don't go up, I'll just hold onto them for the long term. You should invest for the long term you know".

This is called the "buy, hold, pray, and sell-if-you-make-a-quick-profit" strategy, which will possibly give you reasonable (but not good) returns over the long term.

Such people get really scared in a market like we have at the moment, which doesn't seem to have any direction, or is tending towards a bear market. Most people wouldn't even know the true definitions of bull and bear markets.

The buy-and-never-sell-and-diversify-diversift-diversify strategy is another example of investing for the immature. Books and publications like "Money" magazine promote this strategy because it should, given sufficient time, provide average returns. "Average investors deserve average returns" is a quote (read in a John Burley book I think) that sums up my feelings in this matter.

You won't see detailed descriptions and instructions for trading warrants, short selling, futures markets, writing options and the like for people in Money magazine, because most people have enough trouble choosing which stock to buy let alone knowing how to maximise return during bull or bear markets.

Ask people about a strategy for choosing stocks and they either practice some black magic over the sharemarket listings in the newspaper, or they spend lots of money reading up about and buying sharemarket analysis software to give them "all the answers". They take the software's advice without understanding the market itself. The software is nothing more than a tool. It doesn't understand the greater economy and certainly can't predict the future for you.

Ask them about "fundamental analysis" and they will tell you that means reading the newspaper every week and downloading a few prospectuses. Ask them who Warren Buffett is and most people will stare blankly at you. Ask them about diversification and they'll tell you "I own Telstra AND Optus, so I'm covered either way !". Ask them about the future and they'll tell you "the share market always goes up". Tell them that there are periods in recent history where the sharemarket has taken up to 7 years to return to new highs after a down period and they'll tell you "things are different these days". Ask them about currency hedging and foreign investment and they'll run a mile.

If your goal is to maximise your investment returns while minimising your risk, I certainly agree that eductation is one of the most important tools irrespective of your choice of investment vehicle. Assuming that people truely understand more about the sharemarket than commercial property investment is more a little foolish of them in my opinion.

One thing I will say, however, to provide a little balance to by rant here, is that given the popularity of sharemarket investing, there is certainly much more information and education around for those people who recognise that they do need to learn something before they dive in. The fact the markets are practically "virtual" and company information and research material is available on the internet means that you can do a lot of your learning relative quickly and easily and from the "comfort of your own home". I certainly don't see lots of books on "Commercial Property Investing for Dummies" in the bookstores ! Heck, I don't even see any "Building Wealth through Commercial Property" seminars on offer !

So if we assume that learning about shares is going to be easier then learning about commercial property, then maybe that is the better way to direct people. But remember that there are many many people in the world who made their fortunes in property before the internet was readily available to the general public. They did not have access to chat forums like this. They did not have access to research data at their fingertips. They did it the old fashioned way... leg work and personal contact !

Don't give up on commercial property. I think the rewards can be well worth the risks.

And once my Telstra 2 shares go back above their offer price I'm going to sell them and by an office block :p

 
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Reply: 1.2.1
From: Louie Langov


Thanks for the feed back guys, i come from a shares background so certainly can understand, some of the arguments. However some lenders will go with 10% deposit only, and the return is so much better, also maintenance is non existant. If you buy in a good area, and you may not need to shell out that much as you might think. My thinking inroder to minimize risk was to have 2-3 commerials under my belt so as to then launch into residential, which in theory should accelerate growth within the residential market.
Also if someone could suggest a good book or net site covering commercial it would be appreciated.
 
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Reply: 1.2.1.1
From: Tai Melb


Hi all,

I agrees with Sim so I also consider
a commercial property.

Here's the deal I am considering.

230 sqm over 2 levels on St Kilda Road (city) with 2 car parks.

asking price $300,000.

There are also some residencial apartments
in the block so it may be possible to
convert it into 2 aparmtments.
(I am not sure about permit here?).
Current lease is about $35,000+.

So what do you think?

Cheers,

Tai
 
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Reply: 1.2.1.1.1
From: Dave :)


wow...sounds like a good deal.

Dave

-----Original Message-----
From: propertyforum Listmanager
[mailto:listmanager@bne003w.webcentral.com.au]
Sent: None
Subject: commercial vs residential


From: "Tai L" <taile@magicaldesk.com>

Hi all,

I agrees with Sim so I also consider
a commercial property.

Here's the deal I am considering.

230 sqm over 2 levels on St Kilda Road (city) with 2 car parks.

asking price $300,000.

There are also some residencial apartments
in the block so it may be possible to
convert it into 2 aparmtments.
(I am not sure about permit here?).
Current lease is about $35,000+.

So what do you think?

Cheers,

Tai



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To start a new topic: mailto:propertyforum@bne003w.webcentral.com.au
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Reply: 1.2.1.1.1.1
From: Mike .


Hi folks,

This is for those budding commercial/industrial property tycoons. The following article from The AFR on Wed 28 March 2001, gets into the mind of a big league property player. The issue relates to Internet Data Centres which will house the hardware to facilitate the coming B2B commerce revolution. The article says, "In the UK, and among a few of the smarter property players in Sydney, these IDCs have been hailed as the birth of a new property market." (hype?) Ray Sproats is the central figure in this piece. When you read the piece, note Ray's concern that the building should be multi purpose. Just in case the deal falls over he can relet to a different user. That's one important element of risk management that these guys have to always consider. Read on...

AFR Article:

There has been a slowdown in the past few months compared with the frenzy of last year. This is partly a factor of the Nasdaq and the state of the US economy. It's no wonder the IDCs are skittish. Full fitout for a facility averages $10,000 a sq m - up to $14,000 in the case of the new Optus facility at Harris Street,  Ultimo - and about half that for a shell and core, which includes all the generators, UPS, air-conditioning and other services.

     But when a single large corporate could take out 40 per cent of the 5,000 sq m of lettable "raised floor space" in Exodus Stage 1, or a whole floor in the 30,000 sq m Global Switch centre, the observers say it's only a matter of time before the next round of development.

     It's in this convergence of market forces that some of the smarter property people can see an opportunity. If the operators can't raise the huge capital required, perhaps somebody else can.

     One such person is Ray Sproats, who is involved in a private property fund for HSBC and has been around long enough to sense a good thing.

     "I think they're a property play," he says. With two properties leased to IDCs already, the Optus centre at Ultimo, originally put together by Nortel, and another at Rhodes,  Sproats has started on what is possibly the local industry's first  spec IDC building, at 68 Mentmore Avenue, Rosebery. His idea is to stick with the shell only. The former battery plant is ideal - built of concrete, a sub-station on site, and close to the Southern Cross Cable.

"These people come here with grand plans to build 15,000 sq m - 20,000 sq m, then they get into a panic and pull back; they can't raise the money," says Sproats. "That's why I look at how I can finance this. - The question is, can I take it to the next level?"

  You'd never get debt funding, he believes. "The valuers can't handle it." Equity, however, might be another matter. "There is an unbelievable opportunity for a fund to go right through Asia," says Sproats. It could put in half the fitouts and let the operators do the rest. At the end of the lease, or if the operator goes broke, you still have the basic infrastructure that may well appeal to another IDC.

  In a small way, the market is soon to test any premium values that attach to a relet IDC. A 1,000 sq m centre which Compaq fitted out in 1996 and is now vacating is being put to the market at asking rentals of $240 a sq m. Leasing agent Alistair Meadows of DTZ says comparable non-data centre properties are around $150-$200 a sq m. Meantime, the market is yet to place any premium on location alone, even though suitable sites are rare.

  Competition for sites may change property values eventually, says Sproats, and he is looking forward to seeing how the market review goes at his Harris Street property in two years' time.

  Tony Harwood, director of structured finance at Dresdner Kleinwort Wasserstein, has also been looking at the econornics of IDCs, armed with some impressive analysis from the company's European offices. He agrees valuation is the key.

  "Do you value the IDC with or stripped of its equipment,HVAC, power - as a generic building? Can people get comfortable with the' reletting risk, should the need arise? After all, it's a start-up business and these people are very aggressive."

  Harwood agrees that the volatile nature of dot coms, plus the high capex needs of IDCS, make them a natural for some kind of larger property vehicle, but you need to deal with the stringent valuation standards.
 
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