Leasing - Mixed Bag

Well, we seem to be coming into a bit of a purple patch when it comes to leasing out our properties at the moment....the purple mainly originating from the bruising.


It's my main job at the moment, juggling all of the Tenancies and trying to ;

a) Maintain the current Tenants
b) attract new Tenants
c) Roll over existing Tenants whose Lease is about to expire


Pretty normal stuff for most Landlords in this game of renting out boxes, but the lead times on our stuff seem to be a bit longer.


I say a mixed bag cos some of the stock has been vacant for over 18 months (not so good :eek: ), some 6 months, some 4 months.


Others still have 6 months to go on their current 7 Lease and have approached us about extending for another 10 years.....be good if that comes off. I've just put the finishing touches to a market review notice, offering them two rental levels, one if they simply exercise their 3 year option, and a slightly lower one if they enter into a fresh 10+5+5 year stretch.


Another just emailed me two days to say "I realise we have just over a year to go, but we would like to know if you are willing to offer another 10 year Lease over the Premises." All looks rosey, but I don't want to answer them too quickly just in case they get the wrong impression. Might leave that one 'til March next year before replying :D


As both are coming to an end, we finally get to hook in with market rent reviews (the CIP Landlord's birthday present). We've only had two of these in our life, the first one allowing us to retire from work....so we like these alot.


I suppose it all comes out in the wash, and it's the compound result in your portfolio that counts, rather than the individual property performance....but I'm taking heart from something I learnt off Kerry Packer, and that is 'it's OK to have a few losses, just make sure your big gains outweigh the losses'.


Fortunately, the empty stuff is on the smaller end of things, and the two Tenancies chomping at the bit to renew are the biggies. I am wary of treading carefully with these, usually requiring a little more tact than I display here on the forum, as with a 10 year Lease, one wrong move at the start has long lasting implications.


The 4 month vacancy is a normal 4x2 brick and tile house 5km from the CBD. It's got immaculate gardens, but for some reason is always hard to let. The previous Tenant was in there for 4 years straight paying $ 820 pw, but eventually left to purchase their own house. It took 6 months to let it before they moved in. We've had no less than 4 agents try and secure a Tenant since early January - supposedly the peak of the season.....but alas not even one application submitted. Leasing agents are at a loss. We've dropped the rent to $ 700 pw and still not a nibble. For an asset worth 1.4m, how low do you need to go to secure a Tenant. At $ 700 pw, that's a gross yield of 2.6% and a nett yield after outgoings of 2.0%......and yes, this poxy house is currently on my mental chopping block. My customers for this asset simply won't / don't / can't pay a decent return and so by my investing definitions it must go.


I'd be interested to hear your thoughts on how your leasing efforts are travelling.
 
I know it's a simple question, but is the money you asking for your smaller shop's attractive to tenants, Eg. When joe average jumps onto real commercial to look for a shop to run his pet supplys store and sort's by size and amount of rent do you come at the top of the list?

In a very poor local (Australia) retail environment you will probably have to offer some nice incentives to attract tenants. Possibly approaching tenants in the local area in smaller shops (arcade style) mention to them you have retail space @ good rates... i think it may be hard to apply your bleed every last dollar from them style with small tenants in retail they just haven't got the dosh

might be an idea to sell your house if you are not happy with the performance and pay down some commercial debt (1.4mill * commercial rate)

I don't have any CIP, but i'm seeing a few more places with leased signs on them, so thats either a sign of the leasing market is picking up or land lords are dropping their rents to meet the market rather then letting space sit empty and waiting

Regards,

RH
 
I would also consider selling to pay down commercial debt. So with your vacancies you'd be getting 1-1.3% yield some years?
 
Another just emailed me two days to say "I realise we have just over a year to go, but we would like to know if you are willing to offer another 10 year Lease over the Premises." All looks rosey, but I don't want to answer them too quickly just in case they get the wrong impression. Might leave that one 'til March next year before replying :D

By not replying for a long time (if you are serious about doing that), aren't you risking them looking for alternative premises in case you jerk them about, or refuse to renew? I would not want them to start looking for Plan B premises in case they find something that suits them better, or in case they see you as playing games with them.

The 4 month vacancy is a normal 4x2 brick and tile house 5km from the CBD. It's got immaculate gardens, but for some reason is always hard to let. The previous Tenant was in there for 4 years straight paying $ 820 pw, but eventually left to purchase their own house. It took 6 months to let it before they moved in. We've had no less than 4 agents try and secure a Tenant since early January - supposedly the peak of the season.....but alas not even one application submitted. Leasing agents are at a loss. We've dropped the rent to $ 700 pw and still not a nibble. For an asset worth 1.4m, how low do you need to go to secure a Tenant. At $ 700 pw, that's a gross yield of 2.6% and a nett yield after outgoings of 2.0%......and yes, this poxy house is currently on my mental chopping block. My customers for this asset simply won't / don't / can't pay a decent return and so by my investing definitions it must go.

My parents' house has similar numbers to this, and is harder to find tenants for but the tenants (two so far) have been fantastic, high quality.

We started at $800 and ended up dropping to $700 to get somebody 18 months ago. When they moved, we got $750 easily. It is a different city, so that means nothing, but I'd rather have 2% of "something" rather than 0% of "nothing".

Of course, if you end up with constantly having rabble in it and constantly having to clean it up, then it is probably better to sell it, bite the bullet with the tax and never have to worry about it again.
 
Pretty simple Dazz. Your asking too much for rent, which is why it's unrented for so long.

The residential market (despite what the bulls say), is not as tight as you would expect. Tenants (and I'm now one), can afford to be more picky.
The commercial market is cooling as businesses find it hard in the slowdown.
 
I know it's a simple question, but is the money you asking for your smaller shop's attractive to tenants


Hi R-H,


We haven't started advertising the small retail shops we have as yet. They are yet to be re-furbished, so that retail space isn't included in my comments. Although I agree with your sentiments, the retail leasing market does appear to be poor just now.


might be an idea to sell your house if you are not happy with the performance and pay down some commercial debt (1.4mill * commercial rate)


Yes, these are my thoughts as well. 2% nett yield doesn't float my boat. I reckon we've squeezed most of the capital value out of it over the last 12 years of ownership. It's more than tripled, and I cannot see it doing it again in this Perth market anytime soon.

On the bright side we get to ;

  • Side step the leasing out problem of the house
  • Not have to deal with ressy Tenants or the RTA at that location
  • Get to eliminate the 400K ressy loan at over 7% ( $ 538 pw)
  • Reduce our Land Tax bill by over 7K pa
  • Get to eliminate another 800K of comm. debt at over 8% ( $ 1,230 pw)

The only downside is we'll need to pay CGT. This has been my only hurdle in the past, but frankly I'm over it. Happy to pay it for those above benefits.
 
Is your property missing a desireable feature like aircon, etc?


It is missing undercover car storage. Simply a nice driveway for 2 cars. No garage and no carport.


My PM tells me rentals in Perth are tightening and they are having to knock back a lot of good tenants.


Yes, that's what our last 4 leasing agents told us as well....but despite all of their promises, all of their websites, all of their signs, all of their ads, dropping the asking price by $ 120 pw there has not been one application received.

Their only response / tool available to them is to "drop it further"......but my question is, at 2.0% nett yield, how much lower does this asset have to go before we are able to inherit our next lot of whingers ??

Do I really want to hang onto an asset that can only generate 1.something % nett yield....and can't I do better than that ??
 
with that house have you considered furnishing it and leasing it to execs? it still wont be an amazing return but it should get the thing filled

if I hadn't just bought (spousal pressure) I would call you to lease it... sounds like a deal to me.
 
It is missing undercover car storage. Simply a nice driveway for 2 cars. No garage and no carport.

I could certainly see how not having a carport garage when all other properties in area offer one or the other or both could deter potential tenants. It could also deter potential buyers who will compare along similar lines unless it's a bulldoze job.

Is there land to build a double carport?

If there is land available why not just build an oversized double carport. Can be built very economically particularly if you do it yourself. We built one not so long ago which was a kit job and cost all of $2500 to buy. Bit of a mecano set affair to assemble but we got there.

We installed this for the same reason, property a little slow to rent as no garage or carport - better now.

Cheers
 
Hi Andy,


See attached for a photo, it's definitely not a knockdown job.


There is enough land for a SLUG, not a double.....trouble is I have neither the time, nor the expertise nor the willingness to go through all of the council nonsense and cost to achieve 2% nett yield much further down the track.


What is a nice 4 x 2 B/T home 5km from the CBD worth nowadays ?? Obviously not $ 700 pw....
 

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Hi Andy,


See attached for a photo, it's definitely not a knockdown job.


There is enough land for a SLUG, not a double.....trouble is I have neither the time, nor the expertise nor the willingness to go through all of the council nonsense and cost to achieve 2% nett yield much further down the track.


What is a nice 4 x 2 B/T home 5km from the CBD worth nowadays ?? Obviously not $ 700 pw....

Hi Dazz,

I think you have identified the problem, most people paying those sort of dollars will require garaging, I am sure I would expect it in that bracket.

Sell it or get someone to build a garage for you, no sense mucking about.

With your major retailer I would definitely be opening a dialogue with them well before March, business decisions can take 6 months with big places (as you have found out)

Give your self a chrissie present and lock them in before that, if the a** falls out of things in the USA after QE2 stops they may decide not to renew.
 
Sell it or get someone to build a garage for you, no sense mucking about.

Yep, I've pretty much come to the same conclusion. I'd taking the former in a heartbeat, but alas, I am the minority stakeholder.

With your major retailer I would definitely be opening a dialogue with them well before March, business decisions can take 6 months with big places (as you have found out)...they may decide not to renew.

Not sure with this one Macca. As I said previously, none of this is about retail. This one is a reasonable sized office taking up an entire floor in Pitt St, Sydney CBD. The Lease expires in June next year. The Tenant (multi-national) occupies 6 out of the 20 floors in the building, and has naming rights all of the building.

They've just entered a fresh 10 year Lease with the floor above ours, where the CEO sits, so I don't think they are going anywhere. Our floor is mainly office space, where the IT and lower admin staff sit. More importantly, it houses their entire IT infrastructure, taking up about 1/6th of the floor supporting at least 4 countries.....so obviously they cannot have that down for even a day.

They realise that as well, and so are just feeling us out I believe so they can make arrangements if we say no. I'm planning on giving them a general "we are open to dialogue", but I cannot afford to leap at the prospect otherwise their CEO will correspondingly beat us down on the rent, which ain't too good when you're locking it in for 10 years with few reviews between.

As I said, it needs to be played with a straight bat. The fly in the ointment is that our floor is the most expensive for them by a country mile, as I am forcing them to pay outgoings. The other 5 floors they rent are on a gross lease basis - most of Pitt St is apparently, which is really weird.

I fear this negotiation may turn out to be a full 5 day series, and this 2 line email from them is simply the opening delivery whistling past our ears, seeing if we have our helmet on.
 
Evening Dazz & all,

No garage is one thing, endless gardening & trips to the dump smacked me in the face as soon as I saw the photo.

I guess people paying $700/wk plus don't want their flash car(s) out in the open, unless you live in Sydney where this is just a fact of life.

The gardens are nice to look at, but I wouldn't want to be responsible for them as a tenant.....not when i'm paying $700/wk!!

Maybe you can chainsaw the trees and D9 all the other gardeny type stuff and build a few sheds on the block to lease out??? :rolleyes:

Yep, it's nice, but it's also an anchor........off load it.

Cheers,

Ian.
 
Yep, I've pretty much come to the same conclusion. I'd taking the former in a heartbeat, but alas, I am the minority stakeholder.



Not sure with this one Macca. As I said previously, none of this is about retail. This one is a reasonable sized office taking up an entire floor in Pitt St, Sydney CBD. The Lease expires in June next year. The Tenant (multi-national) occupies 6 out of the 20 floors in the building, and has naming rights all of the building.

They've just entered a fresh 10 year Lease with the floor above ours, where the CEO sits, so I don't think they are going anywhere. Our floor is mainly office space, where the IT and lower admin staff sit. More importantly, it houses their entire IT infrastructure, taking up about 1/6th of the floor supporting at least 4 countries.....so obviously they cannot have that down for even a day.

They realise that as well, and so are just feeling us out I believe so they can make arrangements if we say no. I'm planning on giving them a general "we are open to dialogue", but I cannot afford to leap at the prospect otherwise their CEO will correspondingly beat us down on the rent, which ain't too good when you're locking it in for 10 years with few reviews between.

As I said, it needs to be played with a straight bat. The fly in the ointment is that our floor is the most expensive for them by a country mile, as I am forcing them to pay outgoings. The other 5 floors they rent are on a gross lease basis - most of Pitt St is apparently, which is really weird.

I fear this negotiation may turn out to be a full 5 day series, and this 2 line email from them is simply the opening delivery whistling past our ears, seeing if we have our helmet on.

Aahh! That is different then, they are sort of locked in aren't they, well done :)

Be gentle and they will still like you in the morning
 
Correct me on this if I am wrong, but isn't the demographic of people who can afford to rent at $700-$800 pw small?
As they would basically be professionals (who very likely already own their own home) or exec's whose accomodation is paid by the employer. Therefore you will always attract a long term high quality tenant at that price. However the lead time to finding another high quality tenant might be longer as they are less in number.
 
liquidate it.

why hold it if you're not happy with it and costing you money....?

there's a case there for "opportunity cost", as much as i hate to admit it.
 
If your major tenants are public companies I'd look at all their quarterly reports for the last few years to try and glean some info on their plans.
Some large private corps will also have reports available.
As for retail it's always a good idea to approach competitors or similar biz in nearby areas looking to expand.
Of course you'd think the REA would do that, but they rarely are proactive and need a little prodding.
 
Resi

Are there more expensive properties in the area that are renting? In say the $900-1000 bracket.

Can you do new kitchens and bathrooms (not sure how old they are), carport/garage and then put the rent up to hit the next bracket? Also throw in the cost of a fortnightly gardener for the extra rent you will charge.

------

Comm

Are there empty floors in the comm building at the moment that they are going to try and use against you for leverage? Are they trying to lock something in this financial year to reduce costs next year? Over a year in advance sounds a little too proactive for most businesses.
 
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