Commerical property growth rate - similar to rental growth?
- Thread starter DavidMc
- Start date
No. Valuation of commercial premises is basd on the sustainability of the cash flows. if you manage an above market rent for a 3 year lease it will not have a significant effect on the value of the building. That is not to say that someone may be prepared to pay a premium for the asset.
Depends on what market rents are too.
Welcome David. It's a brand new world.
Not to the best of my knowledge.
I've looked at vacant blocks of commercial and industrial vacant land and their values have been sky high, and they haven't generated a stitch of rent in decades.
I've also looked at old industrial buildings and old commercial office towers. Developers value the site based on what they can build to the highest use of the land. What is currently on there and what it rents for has no bearing whatsoever on what it is valued at. It's just a one line demolition cost on their development XLS.
A few years ago we were looking at an old carpark with weeds growing through the asphalt. It had about 135 carbays roughly (hard to see, the paint lines had faded). It rented for about $ 130K per annum. They were asking about $ 14m for it. A 0.9% gross yield....joy.
The value of that property at that stage was totally disconnected from the lease.
A very large company came in and picked it up for about 13.5m unconditional cash, then spent the next 4 years and 28 million building a 5 storey huge floorplate office tower that is now leased long term to a very large international company, renting for about 5.5 million net p.a.
The value of that property is very much now tied to the lease.
Not at all....it is not fair to say. Looking at the capital growth we've experienced over the years vs the escalation rates of the income agreed within the Lease, they do not match at all. There appears to be absolutely no correlation whatsoever.
Thanks everyone for your helpful responses.
I'm looking at a share in an existing commercial property. I'm sure if I tell more about the property I'll get a better answer.
The type of property would be a Industrial Property (a modern high quality office and warehouse facility built in 2000 - i.e. it's 'highest and best use' has already been realised (for the most part)).
Purchase price - circa $9m
Yearly rent - $760,000
Initial yield is around 8.5%
There are 3% increases built into the 8 year lease (with options).
I know it's all just a guess, but what would be a reasonable working figure to put into my XLSs for 'capital growth' (assuming it will grow at the average rate)?
I'm looking at a share in an existing commercial property. I'm sure if I tell more about the property I'll get a better answer.
The type of property would be a Industrial Property (a modern high quality office and warehouse facility built in 2000 - i.e. it's 'highest and best use' has already been realised (for the most part)).
Purchase price - circa $9m
Yearly rent - $760,000
Initial yield is around 8.5%
There are 3% increases built into the 8 year lease (with options).
I know it's all just a guess, but what would be a reasonable working figure to put into my XLSs for 'capital growth' (assuming it will grow at the average rate)?
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Here's something interesting - http://business.nab.com.au/wp-content/uploads/2013/05/q1-cps-summary-2013.pdf.
Seems to suggest the outlook for commercial property is quite positive! Not really sure how worthwhile this is though, perhaps commercial properties are too different to group them all like this and they have so many variables.
In lieu of any better guesses perhaps I'll go with 2% and 3% (I run 5% and 7% for residential as a comparison).
Seems to suggest the outlook for commercial property is quite positive! Not really sure how worthwhile this is though, perhaps commercial properties are too different to group them all like this and they have so many variables.
In lieu of any better guesses perhaps I'll go with 2% and 3% (I run 5% and 7% for residential as a comparison).
As others have mentioned, this only holds true if the market rental is going up at the same rate.
At $9m market segment with an 8 year lease (assuming a new term?) 8.5% doesnt sound too bad but it really depends on the quality of the tenant and the security of the cash flow. For top notch tenants with appropriate Security Deposits and Guarantors recent sales are starting to sneak into the high 7% where a couple of years ago even the best properties were showing yields of above 8%.
Ahhh OK. This makes sense. Thanks!
So even though the rent will be going up, if this happens to push it above market rent the value will stay the same (or in line with market rent). Good for cash flow but that's it.
Others I have spoken to tell me to only count the rent and treat any CG as a bonus, I see what they mean now (even more so that residential).
So I should really do the sums with 0 and 3%? Obviously this is CF+ given a 8.5% net yield and 5% borrowings.
I love the sound of commercial, hardly any outgoings and professional tenants.
It's usually the massive amount of equity required to get it.
The textbook answer is 'higher vacancies'. I would imagine you need to focus a lot of effort on minimising this risk, tenant/lease selection, is the building generic enough to rent out easily or is a very secure/profitable tenant 'locked' into the location with very expensive/heavy equipment.
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