Following on from this post and various other commercial properties I have seen for sale, I pose these thoughts for discussion and critique. I don't pose them as fact but my instinct and I am not sure in my mind these are right.
Maybe this reflects my 'resi' my mindset, however I have always viewed office property investments as opposed to a stand alone building (assuming price is similar) as inferior. Why? Land component in the similar way apartments have minimal. And why does this mean that they are inferior? Less scope for future capital growth because you have the ability to add value to a building ie 2nd or 3 rd floor for additional leasable space or even mixed use through a small resi apartment. Whereas office space, is essentially that. Its value will pretty much always reflect its cashflow return, whereas a separate building may be subject to the variations of the market. As has been experienced in Melb over the past 2-3 years where retail buildings in inner suburbs have been selling for yields of about 4-5% even when lending has become tighter in this space.
For example, a family member sold a building in Camberwell a couple of years ago to a developer who had already built or started to build a supermarket behind the row of street frontage buildings. The purchase price reflected a yield of around 2.75%. He wasn't buying for yield but for his development admittedly.
And what is too small for an office space? I have seen in Melbourne 7.8% returns for offices in the city with 3 year leases with an option for another three, but the area is 59sqm. 7.8% yield sounds good but the prospect of minimal capital growth tempers this enthusiasm.
And finally finance. 30% deposit as the standard, generally 15 years P&I, leaves you requiring a higher return just to cover high interest payments. Then you also have to take into account tax, as you will be making a profit based on that return. So you may also need to contribute to the monthly loan but also to the tax man at the end of the year. Mitigates the higher return and cashflow argument a little.
Maybe there is a trade-off between rental return and capital growth as you move from one property type to another.
Maybe this reflects my 'resi' my mindset, however I have always viewed office property investments as opposed to a stand alone building (assuming price is similar) as inferior. Why? Land component in the similar way apartments have minimal. And why does this mean that they are inferior? Less scope for future capital growth because you have the ability to add value to a building ie 2nd or 3 rd floor for additional leasable space or even mixed use through a small resi apartment. Whereas office space, is essentially that. Its value will pretty much always reflect its cashflow return, whereas a separate building may be subject to the variations of the market. As has been experienced in Melb over the past 2-3 years where retail buildings in inner suburbs have been selling for yields of about 4-5% even when lending has become tighter in this space.
For example, a family member sold a building in Camberwell a couple of years ago to a developer who had already built or started to build a supermarket behind the row of street frontage buildings. The purchase price reflected a yield of around 2.75%. He wasn't buying for yield but for his development admittedly.
And what is too small for an office space? I have seen in Melbourne 7.8% returns for offices in the city with 3 year leases with an option for another three, but the area is 59sqm. 7.8% yield sounds good but the prospect of minimal capital growth tempers this enthusiasm.
And finally finance. 30% deposit as the standard, generally 15 years P&I, leaves you requiring a higher return just to cover high interest payments. Then you also have to take into account tax, as you will be making a profit based on that return. So you may also need to contribute to the monthly loan but also to the tax man at the end of the year. Mitigates the higher return and cashflow argument a little.
Maybe there is a trade-off between rental return and capital growth as you move from one property type to another.
