What do you look for in commercial property investment?

Just want to add to the location, location, location context.

Extract from a text from my valuation course:

One oft-heard shibboleth in real estate circles is that "the most important three determinants of land value are location, location and location". This is, of course, an over-simplification because the real issue is location with respect to what? Indeed, the writer is not aware of any case wherein it has been answered with precision. The origin of the phrase is probably due to Hurd (1903, p 113).

"Since value depends on economic rent, and rent on location and location on convenience, and convenience on nearness, we may eliminate the intermediate steps and say that value depends on nearness. The next question is, nearness to what?" Whipple, 2006 p 8.

My knowledge is mostly theoretical that's why I ask these questions in this forum. I'm no means an expert but I do read a lot.
 
Just want to add to the location, location, location context.

Extract from a text from my valuation course:

One oft-heard shibboleth in real estate circles is that "the most important three determinants of land value are location, location and location". This is, of course, an over-simplification because the real issue is location with respect to what? Indeed, the writer is not aware of any case wherein it has been answered with precision. The origin of the phrase is probably due to Hurd (1903, p 113).

"Since value depends on economic rent, and rent on location and location on convenience, and convenience on nearness, we may eliminate the intermediate steps and say that value depends on nearness. The next question is, nearness to what?" Whipple, 2006 p 8.

My knowledge is mostly theoretical that's why I ask these questions in this forum. I'm no means an expert but I do read a lot.

Not sure how to answer the theory part, and also how much value that I can add...when I was on the market for a warehouse/commercial property I always found it the safest bet it was near a main road (e.g. for Melbourne Warrigal Road, North Road, Ballarat Road etc).

Whilst being on bigger roads means better access for trucks, traffic etc and also freeways, I prefer the "feeder" roads that are just off the main roads. I always found the start of the road to be worth more than at the end where it's isolated...

Also make sure you have plenty of neighbours/industry around you...
 
A great thread and interesting read. Just a few thoughts to add to the mix.

A few posts here talk about the importance of traffic. I agree and the importance is relative to the zoning and how people intend to use it. As you can imagine, retail will generally place higher value on traffic volumes compared to office space (who tend to value access to transport options for their staff members) or farming (a completely different kettle of fish).

Therefore, I'd recommend doing some careful research in the areas most important to that type of property. How likely is the drive-by or foot-traffic about to change? What's the likelihood and impact of any changes to the area?

For example, there was a roundabout on Brisbane's north side where they cut off one of the roads feeding into the roundabout, converting it into a dead-end street. The commercial property in that street had strong drive-by traffic which almost dried up overnight... along with the property's value.

Most of the time, changes to traffic have in inverse relationship to value compared to residential property. That is, an increase in traffic is usually good for commercial but bad for residential (a generalisation and not always true - you'll find exceptions to the rule on both sides).

Where to do your research? Searches, regional and council plans, read the local newspapers, publications by commercial agents in the area, talk to the agents... and use your imagination. What do you think the future holds for the area you're buying into? If your buying to hold for 20+ years, what broad economic movements (shifts in supply and demand) are likely to effect the property during that period and how versatile is the property to meet those movements? Some of this is hazy crystal ball stuff, but it's at least worth thinking about.

To use history as a guide, the Mactaggarts Woolstore comes to mind (a Brisbane river front commercial property, built in 1926 and used for a variety of purposes in it's colourful history). It's now used as residential apartment space.
 
I'm currently looking at office space in an industrial area.

The price is good psqm and the return is awesome what I would like to know is apart from RPdata are there any other websites that offer valuations. The agent that is selling it is useless and is offering no help whatsoever.

Using the realcommercial and other websites is helping but I'm dubious of using those values as what people are asking and what they accept is different.
 
The price is good psqm and the return is awesome what I would like to know is apart from RPdata are there any other websites that offer valuations. The agent that is selling it is useless and is offering no help whatsoever.

If it were in Brisbane, I might be able to help.

If not, you could talk to a variety of CP REAs not involved in the deal and ask for their opinion. Listen to the rationale they offer and work out what makes sense and what doesn't for yourself.

CP is a bit trickier compared to Resi when it comes to automatic valuation tools (I think they're pretty useless for CP to be honest). Most seem to include a CG calculation, which extrapolates previous sales data and produces a value at today's price which doesn't reflect our current market trend. They also only seem to use 'comparable' method instead of 'sum of costs', 'capitalisation' methods, etc. Bit limited in my view, but they are limited by the information stored in their databases, so comparable method is about all they can handle.
 
I'm currently looking at office space in an industrial area.

The price is good psqm and the return is awesome what I would like to know is apart from RPdata are there any other websites that offer valuations. The agent that is selling it is useless and is offering no help whatsoever.

Using the realcommercial and other websites is helping but I'm dubious of using those values as what people are asking and what they accept is different.

I believe most RE agents are only able to offer appraisals depending on their qualifications of course. Valuation would also depend on what you want to use it for, e.g. getting finance or selling off the asset. I believe if you have an idea of what the land is worth and what the assets in the land is worth, then you'll be in a better position to negotiate.

Dazz might be able to provide more input in terms of valuation. I haven't had the chance to talk to commercial property agents yet and hoping to in the near future.
 
The most important factor is the covenant of lease.

You are buying a cashflow producing property and the security of that cashflow is generally what determines the value.

In essence in valuing a cashflow property you are dividing the income stream by the appropriate rate of return.

That appropriate rate of return should reflect primarily the risk in continuing to receive that income,wether that income will fluctuate (ratchet clauses) , wether there will be growth at least in line with CPI.

Buying a bank, your income stream is from a bank not unlike interest from a term deposit. There is less risk that the tenant will default than from a smaller company.

Would you sooner have your money in a 10 year term deposit in the bank returning 6% or in the form of a lease from the bank returning 5% plus CPI?

Alternatively if you buy an old industrial building that is used as a Dad and Son auto repair shop in an area that has just had a Kmart and an Ultratune shop open down the road recently, you should want a higher rate of return even if they have a 10 year lease with CPI increases over the place. If they go out of business it may be hard to relet a property that has few other potential uses and you may have environmental risks as well. Directors guarantees are generally worthless.

How much higher rate of return do you want for this property over buying the bank? What about 15%pa? sound good? .. yes if they stay in business... but what if they close up, you fight their liquidator, take 6 months to get posession then have trouble releasing the place and end up selling it 18 months later at contaminated land value as no one wants an old place like that, either to buy or rent.

This is why automated valuation systems do not work for commercial properties, they cannot assess the quality of the covenant of lease.

cheers

RightValue
 
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