Retail Premises

[Doug]

I already own a couple of IPs – well the bank does. I’m now looking at a retail shop in my area up for auction next month. The numbers crunch well, but my concern is that even with the location if the current tenant leaves I’ll be left servicing the loan with funds best spent elsewhere. Does anyone else have commercial premises? What pitfalls have you experienced? Any advice to offer? Tanks

If I don't win the auction then no worries - just wait till the next one comes up.

D

 

[Aimjoy]

The numbers crunch well, but my concern is that even with the location if the current tenant leaves I’ll be left servicing the loan with funds best spent elsewhere. D

Doug,

That's the problem with commercial / retail. There can be long vacancies - perhaps not now but certainly in other parts of the property cycle - which will eventually come. We can probably all remember walking down some streets where there is one vacant shop after another. So for the average Joe, it is often impossible to service the loan through those vacancy periods.

If you were wanting to diversify into commercial/retail you might be better off doing it through a listed property trust. Returns (as you rightly point out) can be good & even better than residential.

Other thing to remember is that valuations on commercial are normally done on cap rate i.e. rent $50K pa & cap rate 10% = $500K val
If the place is vacant then the val can be well ...........not good.

Also when the market experiences high vacancy rates, the Westfield's of the world offer things like free fit-out or 12 months rent free. Try competing with that!

However, if your retail premise is different to all the above then it might be a good investment. I have a friend in Mlbourne with a shop and he's had the same good tenant in there for over 5 years.

Foe me though the possibility of vacancy is too risky - I'm fairly highly geared and need rents in every month Your situation might be different.

 

[pulse]

Doug, I have a bank and an op shop.

The bank has an attached residence and although in a country town, the mining boom hopefully will mean they won't move out in the near future. The op shop is only renting for $120 per week but they are great tenants.

Good points:
tenant pays outgoings
higher yields
no need for property management
always pay rent on time
often pay for their own maintenance (painting, air-con servicing)

Bad points:
higher interest on loans (maybe 1% higher than standard variable)
higher LVR (typically 70%)
higher insurance costs
higher rates (if you have to pay them)
risk of vacancy


If the retail shop is small and you could handle a prolonged vacancy then it is a good way to get an entry into commercial.

Good Luck
Pulse

 

[Michael Yardney]

The rules for commercial real estate investment are very different to residential investment. The problem is many beginnng investors don't realise this and get themeslves into trouble.

They are basically cash flow investments and sold and valued on yield. In an environment where interest rtaes are rising, given the same rent - the value of your commercial proeprty will drop because yields will rise in line with the prvailing interest rates.

this artcicle will explain a bit more about the differences

http://www.propertyupdate.com.au/articles/49/1/Residential-Or-Commercial---Which-is-right-for-you?

 

[sailor]

This is an interesting thread. Could someone please tell me why commercial properties have less CG than residential properties?

 

[The Y-man]

This is an interesting thread. Could someone please tell me why commercial properties have less CG than residential properties?

It is possbile to have CG.

However, as Michael has mentioned above, the valuation is at least partially based on the (present and potential future) yield of the property (i.e. dependent on the business strength and stability of the tenant).

The implication then is that the value is impacted by the general business climate - and in actual fact, my understanding is that commercial property prices follow the share cycle in price movement, although with a lag (due to leases commitments).

As an example, it is theoretically possible to buy a vacant commercial property for a relatively low price, sign up an extremely large, stable, dependable organization on a 15 year lease, and you would see a very large increase in the value of your property.

Cheers,

The Y-man

 

[sailor]

Thanks y-man.

 

[APerry]

Could someone please tell me why commercial properties have less CG than residential properties?

They don't necessarily, they are much more volatile though.

 

[Doug]

Net rent will be 31500pa and I think the property can be purchased between 400k and 450k less gst. So about 7% return.

The current tenants have been in there for years and i don't forsee them moving or going out of business. I'm putting in a fair amount of capital and opted for a 10yr loan so have to find approx 6k pa.

fingers crossed for the auction - will apply deodorant twice that day!!!!

 

[on the move]

Bought a small shop in coastal NSW, one rental enquiry and vacated for 12 months. Lesson learned : never buy shops out of town, never buy shops in an arcade, and doubt if I will buy another commercial property. Have been looking lots of shops for sale and for lease. Hoddle Street Melbourne every second shop is for lease !

 

[saucy gibbon]

Also when the market experiences high vacancy rates, the Westfield's of the world offer things like free fit-out or 12 months rent free. Try competing with that!

Sorry to be picky, however, tenant incentives are offererd regardless of "high" vacancy rates when you are looking at shopping centres.

You may get away without a tenant incentive in a strip shop however the rent will allow for this ie if the rent is $200psm you are unlikely to have to offer an incentive.

As an aside, tenant incentives are a tax deduction, however they must be amortised over the life of the lease.

 

[saucy gibbon]

I already own a couple of IPs – well the bank does. I’m now looking at a retail shop in my area up for auction next month. The numbers crunch well, but my concern is that even with the location if the current tenant leaves I’ll be left servicing the loan with funds best spent elsewhere. Does anyone else have commercial premises? What pitfalls have you experienced? Any advice to offer? Tanks

If I don't win the auction then no worries - just wait till the next one comes up.

D

Ok, on a more constructive note

Have you read the lease ? How long is it, what security is provided, what is the make good clause? WHat is the rent $psm and what is the outgoings clause ? Who owns the fit out ? When does it expire, are there options and if so at what rent?
Do you know what the surrounding shops are being rented at ?
What's on the slab for competing developments ?
Is it a food shop, could it be one ie 3phase power, trade waste, grease traps ?
What incentive was required to get the tenant in ?
Are there any arrears, what is the rent payment history like ?
Level of vacancies nearby ?
Tenant history ie stable occupation.
What relationship does the tenant have with the seller ? Ie is the rent artificially high to secure a higher sale price?
What is the cost if running the property (outgoings) ?
Is there a report on the condition of the building ie asbestos, what was types of tenant have occupied it in the past ?

 

[The Y-man]

Bought a small shop in coastal NSW, one rental enquiry and vacated for 12 months. Lesson learned : never buy shops out of town, never buy shops in an arcade, and doubt if I will buy another commercial property. Have been looking lots of shops for sale and for lease. Hoddle Street Melbourne every second shop is for lease !

I guess that's why my money is with Westfield, GPT, Investa, Gandell, etc....

Cheers,

The Y-man

 

[Dazz]

As an example, it is theoretically possible to buy a vacant commercial property for a relatively low price, sign up an extremely large, stable, dependable organization on a 15 year lease, and you would see a very large increase in the value of your property.

It also works pretty well in practice...

In fact, once you've had a few successes using the above method, you get to the point where you avoid tenanted CIP's....'cos there are greater CG to be made from the empty stuff.

Unfounded fears spread by inexperienced RIP investor's is staggering sometimes, especially when it's consistently written in best selling books..

 

[Kristine..]

Hi Doug

We have owned a bank for nearly ten years, it has more than doubled in capital value in that time, and apart from when I ran my retail business there, has never been without a tenant.

We also own a retail building which is outfitted with office partitioning, as the retail nature of the neighbourhood has diminished and the shops are now occupied by quasi professional and service businesses. Just let that on a two year lease. Improved about 35% in 30 months.

I am also looking for prime retail space for my new franchise and negotiating for premises which do not come available until April 2007, yet there are other parties interested at the same time. This one shop will cost me more than the other two combined!

Commercial / Retail is good if you don't mind having so much equity tied up in them. For general lending a 60%LVR is about it, of course you can fund completely but will be using other securities to raise the necessary funds.

I won't bother making comments about good deals, but suffice to say when I bought both of the commercial properties there was no good reason to do so, except I wanted them. The bank returns about 12% against purchase price although only about 6% against current market value. We paid for the first few years and now it pays, so it all comes out in the wash.

I consider the bank to be the Jewel in the Crown and intend to own it for ever and ever.

Cheers

Kristine

 

[APerry]

For general lending a 60%LVR is about it

That's simply not correct, even in rural areas you can usually get 70% LVR quite easily. There are a number of lenders who will go to 80% LVR on the basis that the loan will be paid down to 70% withing a short period of time, usually 3 years, and Citibank have a product that goes to 85% LVR for those willing to pay a slightly higher interest rate. if you want to go outside of the larger lenders there are a large range of higher LVR commercial products, usually at premium interest rates though.