Sydney CIP

[Piston Broke]

True, so I'll expand a bit more for clarity.
By "risk" I also mean price volatility.
So if you chart prices, or even approximate valuations & prices over a long period of time there is a great deal of variation between peaks and valleys, deviations or wateva u wanna call'em.
Commonly known as volatility and thus commonly implied as "risk".
What causes some of this volatility imo is the easy money gvien to noobs, new graduates and people who think values only go up every year from now till ever.
It makes no difference where they are, be it new graduates in reits or management funds, or old hands who think after a few bonuses they discovered the secret of never ending rivers of gold.

And whilst I may refer to the big $$ end of town as "professionals", does'nt mean they are experienced, smart or competent professionals.
Most of them are the opposite who think they can get rich with OPM, in many cases share or unit holders.
Typical case is a building, once mentioned, that in good times (boom) cost >9mil to build and sold for <3.5m a few years later.
Building after a boom has lots of risk imo.
Buying after the bust from administrators for under 40% of build cost (~70% leased) is a little less (or a lot less!) risky.
9mil in the bank would've been a much better proposition for that few years.
Do I need mention the current state of reits & funds all over the globe who also thought they found the "rivers of gold"?

I also seen & learnt much from a few wise uncles most of whom paid interest rates of up to 24% and experienced their values double, triple, then halve then double again till the last fall.
I've seen the same CIP be sold twice for 1st time >1mil profit, 2nd time >2mil! He sure liked the risk involved. And I used to hang around them like a bad smell asking a million questions in the car, and watching & listening elsewhere eventually being the designated driver. (I'm sure some have seen or drank that dark red stuff that could run your lawnmower)

Of course most resi type people who buy NG property at high LVR and those who buy 3 IPs totaling the value of my front yard will tell you CIP is "risky"
because someone else told them so and they can't get finance as they don't have the cash to get in.

 

[Rob Williams]

I find the topic of risk an interesting and subjective one.
What's the real issue? Is it the perception of the "risk" itself or the lack of tools and resources to mitigate the risk?
As toddlers we learn to walk. We risk falling so we mitigate by walking close to something we can grab.
As we get older, we learn that crossing the road can be risky, so we learn to look both ways and use crossings.
We hear that property investing can be risky, so we learn the risks and learn the tools and strategies to manage those risks.
I think the main issue many investors have with CIP is the lack of knowledge with respect to the risk mitigation strategies compared with resi investment.
I've heard other (well meaning) investors telling me to steer clear of CIP due to the high vacancy levels. These are the people who drive along a main road and see the "For Lease" signs. I don't see them. I see the properties that are not for lease. These are the ones I'm interested in. Properties for which there is demand and not an oversupply.
My resi portfolio didn't grow by selecting properties where people didn't want to live and were not prepared to pay a premium to live there.
It's all in the focus and perception. What one perceives as carrying a high risk may be seen as an acceptable risk by someone with the understanding and tools to manage that risk.
The same risk elements exist for both, only their perception differs.

 

[Piston Broke]

From my POV CIP has a very different risk category than RIP.
Price flutuates much more, and the lending banks also see it very differently as well.
When ReSi values go below loan amount, the gov has always stepped in one way or another.
For CIP this has not happened.
If a CIP goes from 5mil to 3mil, the bank will ask for more security to maintain LVR or sell it off.
Resi are not effected by other houses being built around it, and often they actually increase in value.
CIP can be opposite. If a large competitor opens next door or down the road, how is the current tenant going to be affected.
And if he goes, who is going to lease it next?
And how much is a CIP that nobody wants to lease worth? Not much.
These risks do not apply to resi.
A CIP i know of sold for 4.5mil then 1.9mil then ~4mil and is now worth ~2/2.5 imo.
Sure people can look at that and say "you can 2 mil in a few years", but you can also lose everything in a few years.
I will also repeat the almost finished and almost full building that cost >9mil sold for 3.2 (my bid was 3, but the agent was doin funny stuff), the value would've gone up a few mil and now back down a few mil.
Resi does'nt do that. Unless it's a one mine town and that mine closes down.

Rob those folk who sell trading systems, and the fund managers also like to tell you that "education mitigates risks" and their special tools "minimize risks" but which of them told you the all ords would go down to 3500?
Which one told you REITS would lose 90% of their value and many wiped out?
There was a mining boom right? But RIO & BHP sank like a diamond in a muddy pond.

So what are the tools for managing that risk?
Other than >30% deposit?

 

[Player]

Hey PB, I have made some comments and posed some questions below

From my POV CIP has a very different risk category than RIP. Agree, and of course it also has different types of rewards
Price flutuates much more, and the lending banks also see it very differently as well. Yes. In years gone by as I was retreiving a title from my main lender and I wished a resi title back. They said nope, take the comm title. Worked out well in the end. That has now been shoved into our SMSF at a time when vals were still low so trivial deemed CGT.
When ReSi values go below loan amount, the gov has always stepped in one way or another.
For CIP this has not happened.
If a CIP goes from 5mil to 3mil, the bank will ask for more security to maintain LVR or sell it off.

I am assuming this would occur on a vacant CIP where business sentiment and economic conditions provide for such a drop. And, yes, a cash injection or other security can be called for

Resi are not effected by other houses being built around it, and often they actually increase in value.
CIP can be opposite. If a large competitor opens next door or down the road, how is the current tenant going to be affected.
And if he goes, who is going to lease it next?
And how much is a CIP that nobody wants to lease worth? Not much.
These risks do not apply to resi.
A CIP i know of sold for 4.5mil then 1.9mil then ~4mil and is now worth ~2/2.5 imo.
Sure people can look at that and say "you can 2 mil in a few years", but you can also lose everything in a few years.

Was this vacant the whole time. If a decent lease is in place then the value should go up incrtementally or at the very lest stay the same during uncertain economic times. It is when coming off lease that market forces, changed cap rates and supply/demand can hammer values (or alternately enhance them) and usually this ties in with fixed term fixed rate comm loans that fall due when leases expire.

I will also repeat the almost finished and almost full building that cost >9mil sold for 3.2 (my bid was 3, but the agent was doin funny stuff), the value would've gone up a few mil and now back down a few mil.

Once again, I am curious why the discrepancy? Did cap rates change so suddenly for this to occur?

Resi does'nt do that. Unless it's a one mine town and that mine closes down.

Rob those folk who sell trading systems, and the fund managers also like to tell you that "education mitigates risks" and their special tools "minimize risks" but which of them told you the all ords would go down to 3500?
Which one told you REITS would lose 90% of their value and many wiped out?
There was a mining boom right? But RIO & BHP sank like a diamond in a muddy pond.

So what are the tools for managing that risk? Not playing the game, but then there are no rewards there either
Other than >30% deposit?

Appreciate any further info, so I can learn and others reading these posts can also learn the mechanics of valuations and what exactly influences those values.

Thanks

 

[Ridin-High]

Some deals that i have looked into more deeply recently has shown me their are alot of shady characters out their selling (my price bracket is sub sub 1mill).

Example: A place for sale that has a few vacant shops, but their is a one bigger tenant paying what seems to be a over market rent (expired lease), after doing an RP data search on the name (XYZ Pty Ltd is the owner) and then googling that name and finding out that Pty Ltd is licensed to do work in the field that the main tenant is involved in and the address that they are listed at (different to the address for sale) is the same business as the one operating in the place for sale... just shows their is a slide of hands going on to fudge the figures.. make them look good for the sale.

That's probably a word of warning i could give other people like me lookng for comm property.

 

[Piston Broke]

am assuming this would occur on a vacant CIP where business sentiment and economic conditions provide for such a drop. And, yes, a cash injection or other security can be called for

I've seen it happen on vacant land, vacant CIP and leased CIP.
Wild stuff really.

Was this vacant the whole time. If a decent lease is in place then the value should go up incrementally or at the very lest stay the same during uncertain economic times. It is when coming off lease that market forces, changed cap rates and supply/demand can hammer values (or alternately enhance them) and usually this ties in with fixed term fixed rate comm loans that fall due when leases expire.

No it was not vacant. before 4.9 the price was 2.4 and rent was ~260k.
At 4.9 rent was'nt much over 300k. At ~2m rent was ~200k.
And just to be clear, those numbers are over a time span of ~20yrs.
"supp & demand" is way to generic imo to describe what happens in these markets. There are many specific general & local forces at play.

The closest analogy is the equities market.
Westpac went from $30 to $15 yet it's situation was better in 09 than 07.
BHP went from 50 to <30, yet it's real position improved from what I see.
RIO went from 160 to <40, it's net position deteriorated, but not by much.
The rents on most of those now defunct reits is still being paid and pretty much the same amount, but the price is a few cents.
Or were they all way overpriced for many years? I'd think so.
Explaining all that as "supply & demand" imo is just too simplistic, though it may sound good and put our minds at ease.
CIP, equities and resi went up and down over the decades regardless of amount of buyers, sellers, number of sales or infrastructure and lease.

Once again, I am curious why the discrepancy? Did cap rates change so suddenly for this to occur?

The rate of return from CIP has always been inconsistent, which is a risk factor.
That building lost it's biggest tenant (120k yr) and the space was empty for 6 mths, yet it's value was way more than when it sold for 3.2 with an income of ~450k (my memory is vague on this one, though i should still have a brochure somewhere) though the lease for had'nt been renewed.
Of course the PE values vary (just like they do for RIO) and at one stage it was almost full. But no one was lining up to pay >6mil for it though in theory it was worth that much.

Appreciate any further info, so I can learn and others reading these posts can also learn the mechanics of valuations and what exactly influences those values.

I don't profess to have the answers here, I'm just describing what I've seen from pretty close.
So how do they valuate these "things"?
Well, if you really wanna step back and get a birdseye view the answer is:
[drum roll!]They make it up as they go along!
Now we all like to think that we are in control and that we can calculate this & that, but looking back a few hundred years and the only answer is they have NFI.
For CIP, resi, shares, reits, bonds, currencies, SIVs, options, and a ton of other derivatives including the famous US loan ones.
Yep all those experts have NFI.
Sure they can say "the house next door sold for 300, the one down the road for 400, one's better the other worse so yours must be worth 350".
So is that really telling you how much your house is worth or just what the price expentancy currently is?
Same as saying mining avg PE is 40 therefore RIO must be worth 40, but RIO is a big player so must be PE of 45.
Or RIO avg price for last 3 mths was $120 so at $100 it's undervalued, based on someone's BS idea of a valuation.
What is generally known as "valuations" really have no future predictability from what I see.
Yes they are important right now, specially to the banks and LVR, but that's pretty much it.
They would've loaned $$ based on a GRV of ~9mil, but obviously it was'nt worth that much was it?

So how do you work it out?
It's simply an opinion. And in a market it's my opinion vs someone else's.
I sell cause I reckon it's a dog or can allocate better or prices stop increasing, he buys cause he thinks it's a bargain.
I buy cause I reckon it's cheap, he sells cause he can't afford to keep it, the bank is auctioning it off or the admin has taken over.

geez feels like i've just written a book...

 

[Piston Broke]

book2: revelation

Once again, I am curious why the discrepancy? Did cap rates change so suddenly for this to occur?

Appreciate any further info, so I can learn and others reading these posts can also learn the mechanics of valuations and what exactly influences those values.

Thanks

So what changed?
Everything! The whole economic landscape.
The "unprecedented", "unpredictable" GFC lol.
But it was nothing new, it was'nt even a one in twenty year event.
Was it no demand? There were plenty of buyers all the way down in the share market. Plenty demand according to the charts.
There were also articles on buying CIP in the RE mags including Terry Ryder with many claiming 6-7% return was a good premium

But the big question is "Can you predict exactly what changes when?"
The bigger answer is No.
But as long as you can predict the general direction, and get fairly close to the changes it will work out ok. You gotta be a bit of a historian.
So based on the last few hundred years, you know the market wont go up forever, and wont go down forever.
And generally when it moves, the market is going to overshoot up, and overshoot down.
So you patiently wait it out, doing something nice and safe like resi that can be helped along with income.
We also know after every boom there is generally a bust and credit becomes tight.
But at the end of the boom you need to be cashed up and ready to go.
If your leveraged up you'll have nowhere to go.
When does it bottom out?
Does'nt matter all that much imo, but what does matter is when do the economic/financial conditions change.
Because until that happens, it's just price fluctuations. And imo they haven't yet changed which is why I have'nt been in a hurry last couple years.

Now I know that most people think I make wild assertions and don't conform to the nice thing they read on the paper and hear those nice smiling people on the money channel say, but I'm here on record saying

18-08-2006, 12:58 AM There will probably another run up for a few years until we see a real crash.

In the meantime business will get harder, profits will decrease, un-employement will rise, properties will be vacant, and you will sure see the dowside of the XPJ.

Nothing new really

I'm also here on record argueing with other who insisted that until we have 2 -ng quarters, we're all gonna get rich.
And I was here, going against most on this forum, saying that those magic never lose funds will eventually get whipped.
I'm also all over the Oanda forum a few years ago making my crazy predictions like selling the EU/US at >1.5 based on twenty years charts, saying oil will not go to the moon, Schiff was wrong the EU sux, telling all those experts that the USD was not about to crash but about to get stronger, that the EU has more problems than the US and they will soon come up to the service blah blah.
But i was'nt really making predictions, I was just thinking "in those circumstances this happened before, and the times before that, why won't it happen again?"
I'm no guru, but I do have a good memory most times and I like to read stuff.
It's all there laid out and documented in detail for those who want to read.
I remember Paul Keating on a TV interview (early 90s) clearly saying "We should've limited the banks from giving such easy credit".
The RBA did actually mention what was coming, and a lot of other stuff, for those who were paying close attention.

So what does all this rant have to do with CIP?
Well from what I can tell most CIP follows the economy, and the financial markets.
This is not about months but many years (shorter for a high earner). It's a game of patience.
Those who bought at the right time, well done for taking action.
But there's a time to sow and a time to harvest for me.
I'm still looking around Sydney, but I doubt I'll do anything this year.

The other issue is leases.
When biz is good everybody wants to open a biz or expand and they all need space to rent.
But leases are limited. There's a stack of CIP for sale in Sydney that has not had it's lease renewed last 1-2 yrs.
Gov leases also run out, and there's no guarantee the will renew.
Big corp leases also run out, and same goes for them.
Sometimes these decisions are not necessarily based on good biz of finance.
Sometime they are even based on a bag of cash handed to the person in charge of securing a lease.
So even if a 10 year sounds good, but what happens after that?
Will it occur in the middle of a crisis?
Will your tenant be a pillar of finance like HIH?
A world conquerer like One.Tel?
An investment powerhouse like B&B?
Gov official with a bag of cash?
If you have a large CIP it could be a potential problem if cashflow is tight.

 

[Piston Broke]

book2: revelation

Once again, I am curious why the discrepancy? Did cap rates change so suddenly for this to occur?

Appreciate any further info, so I can learn and others reading these posts can also learn the mechanics of valuations and what exactly influences those values.

Thanks

So what changed?
Everything! The whole economic landscape.
The "unprecedented", "unpredictable" GFC lol.
But it was nothing new, it was'nt even a one in twenty year event.
Was it no demand? There were plenty of buyers all the way down in the share market. Plenty demand according to the charts.
There were also articles on buying CIP in the RE mags including Terry Ryder with many claiming 6-7% return was a good premium

But the big question is "Can you predict exactly what changes when?"
The bigger answer is No.
But as long as you can predict the general direction, and get fairly close to the changes it will work out ok. You gotta be a bit of a historian.
So based on the last few hundred years, you know the market wont go up forever, and wont go down forever.
And generally when it moves, the market is going to overshoot up, and overshoot down.
So you patiently wait it out, doing something nice and safe like resi that can be helped along with income.
We also know after every boom there is generally a bust and credit becomes tight.
But at the end of the boom you need to be cashed up and ready to go.
If your leveraged up you'll have nowhere to go.
When does it bottom out?
Does'nt matter all that much imo, but what does matter is when do the economic/financial conditions change.
Because until that happens, it's just price fluctuations. And imo they haven't yet changed which is why I have'nt been in a hurry last couple years.

Now I know that most people think I make wild assertions and don't conform to the nice thing they read on the paper and hear those nice smiling people on the money channel say, but I'm here on record saying

18-08-2006, 12:58 AM There will probably another run up for a few years until we see a real crash.

In the meantime business will get harder, profits will decrease, un-employement will rise, properties will be vacant, and you will sure see the dowside of the XPJ.

Nothing new really

I'm also here on record argueing with other who insisted that until we have 2 -ng quarters, we're all gonna get rich.
And I was here, going against most on this forum, saying that those magic never lose funds will eventually get whipped.
I'm also all over the Oanda forum a few years ago making my crazy predictions like selling the EU/US at >1.5 based on twenty years charts, saying oil will not go to the moon, Schiff was wrong the EU sux, telling all those experts that the USD was not about to crash but about to get stronger, that the EU has more problems than the US and they will soon come up to the service blah blah.
But i was'nt really making predictions, I was just thinking "in those circumstances this happened before, and the times before that, why won't it happen again?"
I'm no guru, but I do have a good memory most times and I like to read stuff.
It's all there laid out and documented in detail for those who want to read.
I remember Paul Keating on a TV interview (early 90s) clearly saying "We should've limited the banks from giving such easy credit".
The RBA did actually mention what was coming, and a lot of other stuff, for those who were paying close attention.

So what does all this rant have to do with CIP?
Well from what I can tell most CIP follows the economy, and the financial markets.
This is not about months but many years (shorter for a high earner). It's a game of patience.
Those who bought at the right time, well done for taking action.
But there's a time to sow and a time to harvest for me.
I'm still looking around Sydney, but I doubt I'll do anything this year.

The other issue is leases.
When biz is good everybody wants to open a biz or expand and they all need space to rent.
But leases are limited. There's a stack of CIP for sale in Sydney that has not had it's lease renewed last 1-2 yrs.
Gov leases also run out, and there's no guarantee the will renew.
Big corp leases also run out, and same goes for them.
Sometimes these decisions are not necessarily based on good biz of finance.
Sometime they are even based on a bag of cash handed to the person in charge of securing a lease.
So even if a 10 year sounds good, but what happens after that?
Will it occur in the middle of a crisis?
Will your tenant be a pillar of finance like HIH?
A world conquerer like One.Tel?
An investment powerhouse like B&B?
Gov official with a bag of cash?
If you have a large CIP it could be a potential problem if cashflow is tight.

 

[Player]

Thanks for clarifying with the extra info PB. Your thoughts and analogies are appreciated.

Time you collated those musings and created a book.

CIP's are more cyclical due to business sentiment, economic factors and then there are the local factors such as new infrastructure in an area rendering other areas less desirable and even obsolete.

As for values, unfortunately we need the understand the game (even though it appears the consistency of valuations are sometimes suspect) so the banks/lenders can join in and help us play.

The debate of resi versus commercial can take many different slants, however at the end of the day, despite the management issues and extra holding costs, people are always going to need somewhere to live, assuming one has not bought in a terminal tiny town. Even in an over-supplied market, drop the rent enough and you'll get a bite. This lower return reflects the lower risk.

I am sure that (some of) those who invest in the larger CIP assets have risk mitigation strategies to provide a hedge. How do they tackle end of lease? How do they allow for a down market at this time? When (if ever) would they sell?

Cap rates are also something that I find are variable (much) depending on who you speak to. Comm agents will push 'em low to sell their stock at an inflated prices based upon the current rental. Also it varies from suburb to suburb within cities and even precincts to precincts from the little I have observed.

I listen, however try to verify and come up with my own cap rate for an area/precinct that I am keen on by comparing asking rents, current rents and values of sold stock. Difficult data to get hold of, however I am a little more informed. At the end of the day, as with resi as well, a piece of real estate is worth what one is willing to pay and another willing to accept and sell for.

The higher cap rates (yields) are in assets over 3 Mill or so in my searching. I refer to office and industrial. Retail returns are far less enticing and in Melbourne this year are tragic.....less than resi Also one cannot achieve triple net leases with those as retail tenancy acts offer nanny intervention. Unless one own a whole shopping centre.

I am far from knowing it all in this area. I own one retail and whilst it has served me well to date due to it's location and the time I've had it, I would not aspire to another. I have been loosely looking at industrial, however with smaller assets, yields are not so enticing. One does have a larger target audience though as smaller assets are easier to let than larger ones due to the potential tenant/business pool.

I see larger assets as needing buffers in place as lease terms approach their end in case they are not renewed and one finds they at a downturn in the market with rents falling and sentiment waning.

It would be prudent to have a lot of dirt associated with these so that one can transform them into smaller warehouses/sheds to cater to a changing tennant landscape. There would be a couple here on this board that have allowed themselves just that option.

The old adage of buy and never sell may work better in the resi arena (assuming the asset is in demend), however do those that play significantly in the commercial area have this motto? Is it wise to sell as the cycles approach the crest of the upswing? Depends on how lease periods are strucured I imagine, however I would also be keen to hear how others mitigate these risks and not be left holding an empty asset for lengthy periods at end of lease/option term when fixed rate loans are also due for re-negotiation.

I have also rambled a bit here. These are just my thoughts that help me work through my own rationale and learnings. No one should invest based on what I've written; it isn't advice to anyone in particular, just my observations.

 

[Rob Williams]

356 Collins St recently sold for $28.4 million and makes for an interesting case study in the context of the Melbourne CBD property cycle.

Bought in 1986 by Westpac Property Trust for $17.7 million.
Valued in their books in 1989 at $31 million
Sold in 1994 for just $9.75 million
Purchased by SA's Motor Accident Commission in 1998 for $11.7 million
Sold by MAC this year for $28.4 million after holding it thorugh the 2001 and 2007 downturns.

You can look at this scenario from different viewpoints - Westpac Property Trust viewpoint and say "CIP is risky due to the volatile and cyclical nature of the market"
or
MAC's viewpoint and say "The CIP market is cyclical and volatile, you just need to get the timing right, mitigate against the risks of vacancy, rate rises etc (all the same stuff per resi) and the cyclical nature of the market can bring substantial rewards to the table".

It's all in the paradigm shift.

 

[oracle]

356 Collins St recently sold for $28.4 million and makes for an interesting case study in the context of the Melbourne CBD property cycle.

Bought in 1986 by Westpac Property Trust for $17.7 million.
Valued in their books in 1989 at $31 million
Sold in 1994 for just $9.75 million
Purchased by SA's Motor Accident Commission in 1998 for $11.7 million
Sold by MAC this year for $28.4 million after holding it thorugh the 2001 and 2007 downturns.

You can look at this scenario from different viewpoints - Westpac Property Trust viewpoint and say "CIP is risky due to the volatile and cyclical nature of the market"
or
MAC's viewpoint and say "The CIP market is cyclical and volatile, you just need to get the timing right, mitigate against the risks of vacancy, rate rises etc (all the same stuff per resi) and the cyclical nature of the market can bring substantial rewards to the table".

It's all in the paradigm shift.

Hi Rob,

Any details on how much it would have yielded (rental return) at each point? I mean 1986 at 7% yield for purchase price of $17.7 mil would be $1.24 mil. pa. Would it have rented for that 24 yrs ago?

Cheers,
Oracle.

 

[Rob Williams]

Not sure of the historical details, but at sale, the yield was 7.5%. I would imagine that many of the leases might have been negotiated with inducements during the 2007-2009 "crisis".