What makes for a good commercial property?

[wobblysquare]

Setting aside the ability to alter the commercial property itself to improve its returns. I'd just like to brainstorm what makes a good investment property.

Basics
1) High CAP Rate?or at least high relative to local market
2) High WALE
3) Strength of tenant (e.g. Govt. or multinational)
4) comprehensive lease - especially in regards to guarantees
5) Low local vacancies
6) low volume of new stock being built
7) low ability to build new commercial space
8) High cost per square metre to build relative to buying

But how about the less obvious stuff?.like Who make a good tenant?
- Is having a successful fish and chip shop as a tenant a good idea - or bad? Although you might be able to order your fish and chips online, you still will only buy locally.
- Is retail too risky?

- Proximity to public transport +/- ?

- Surely an increase in local population must result in (after a lag), an improvement in demand for local commercial property

- Parking ?

- Near a main road / OR on a main road. Which is better?

I would really like to know what those who actually purchase commercial property look for? Alternatively how do they structure the purchase / lease, to maximise returns over the longer term.

Finally what tricks to they use to turn an ok deal into a great one?such as splitting a commercial space in half, and putting two tenants in place for a higher net return.

ANY thoughts / comments appreciated.

 

[Scott No Mates]

• Location
• Functional obsolescence
• Location
• Proximity to major transport routes eg freeways
• Location
• Distance from CBD
• Location
• Quality of space
• Existing Services (ADSL, Hi capacity power, trade waste)

Proximity to public transport isn't a biggie but parking can be more important.

Did I forget to mention:

• Location

 

[impala67]

...what tricks to they use to turn an ok deal into a great one?..

Many prospective buyers would be put off by short, or concluding leases - Put in offers on commercial property with soon to be concluding leases "subject to the buyer negotiating a new lease" prior to purchase.

 

[wobblysquare]

Location / Exposure

Scotty, thanks for the contribution.

Brainstorming location i will arbitrarily define that to be

1) # of people that work within 1km of the business * X
2) # of people that live within 1km of business * Y
3) # of People that pass the business daily * Z. Provided they can readily Stop / park, to explore what the business offers (parking / access).

So for item 3, a coffee shop may do better with good morning access (inbound traffic)?..and somewhere to pick up the bread/milk, may do better with good afternoon access (outbound traffic).

Location is a nice tip?just retrying to sharpen the definition / clarify what makes a good location.

 

[wobblysquare]

Wale

Many prospective buyers would be put off by short, or concluding leases - Put in offers on commercial property with soon to be concluding leases "subject to the buyer negotiating a new lease" prior to purchase.

Absolutely agree, and a good tip thank you.

WALE = Weighted Average Lease Expiry. if this is zero (i.e. vacant property), then you certainly won't get as many offers as if you have (say) woolworths as 85% of tenancy on 15 years left in a 20 year lease.

So strength and length (remaining) of tenancy are important.

 

[hobo]

I think that the definition of 'good location' will depend a lot on the style of CIP, as well.

eg:
- cafe needs to have a lot of walking traffic / workers nearby, and good parking for those who just want to drop in. Bonus points for good street visibility.
- small retail - similar to above. Specialist retail might be able to be further from walking traffic, but still need to be in a visible area.
- larger/big box retail - all about the visibility of the location, and the ease of access/parking.

etc etc

 

[impala67]

I see a lot of vacancies in good locations and high volume areas in Melbourne CBD and surrounds travelling to work. I find it strange that comparable properties just a few doors down get re-rented while identical properties can't, or do and have little success and need to keep finding new tenants. While other good CBD locations remain vacant long term.

I would say the lease and a successful business is the key. There's a location that may be familiar to most Melbournians in the CBD that sold for over $5million and returns 6-7% on a long lease. The business has been there for decades. I would take that over 3+3+3 or whatever other leases in a similar location even it's a much higher yield. On paper the higher yield looks better, but experience and familiarity with this location will prove the less attractive on paper option to be better long-term.

The quality of the lease has reflected in it's capital growth over the years which is significant. I think this is a topic of one of the threads on SS.

 

[Scott No Mates]

Locational factors vary from tenant to tenant (sorry but I have to put on the tenant's hat hrte).

Site selection is very subjective & varies greatly between occupants. A retailer in a shopping centre may want high pedestrian traffic flow, to be near a major entry or centre court (entertainment precinct) whereas others will have affinities for complimentary products and others looking for comparable retailers. Whereas the SCM is looking to place strategic retailers in specific sites eg Australia Post, health funds or banks to generate the foot traffic.

Similar logic applies to high street retailers however there is less control over these factors ie there's no precincting (each owner has their own agenda), strip retailers come and go but also work on different metrics to the mall retailers (fit out conditions, trading days/times, use of temporary signage, marketing methodology etc).

In sharp contrast, industrial users are considering supply chain issues, access to markets, zoning restrictions, working hours, noise, labour supply etc.

 

[wobblysquare]

Solving the vacancy issue

1) Scott, could you please define SSM (do you mean Soft Systems Methodology?)

To be transparent, i do not own any commercial property, but i am interested to learn the key criteria. From my observations commercial valuation seems to be strongly linked to the income stream and the CAP rate for the local market.

One of the major threats to a CIPs value seems to be having no tenant. So the ability to be able to solve this problem (vacancy), would seem to go a long way towards becoming a successful commercial property investor.

The major ways this seems to be solved is by either
A) Have a long lease in place with a strong tenant (such as woolworths)
B) Have a property that appeals to as wide a range of potential tenants as possible - not just the current tenant. So that it is easy to lease.

So for B) is there a sweet spot in m2 for office/retail space?

I certainly agree that the type of commercial property you have (and what it can be used for) does determine what is beneficial, and what is detrimental. Maybe i need to split into multiple threads (industrial, office, retail, other).

eg
Retail
+ High Foot traffic
+ near entertainment precinct
+ near food court

Industrial
+ Good Access to motorways
+ Good access to rail
+ Good access to port
+ Good access to airport

Office
+ Good access to public transport

 

[wobblysquare]

I see a lot of vacancies in good locations and high volume areas in Melbourne CBD and surrounds travelling to work. I find it strange that comparable properties just a few doors down get re-rented while identical properties can't, or do and have little success and need to keep finding new tenants. While other good CBD locations remain vacant long term.

I would say the lease and a successful business is the key. There's a location that may be familiar to most Melbournians in the CBD that sold for over $5million and returns 6-7% on a long lease. The business has been there for decades. I would take that over 3+3+3 or whatever other leases in a similar location even it's a much higher yield. On paper the higher yield looks better, but experience and familiarity with this location will prove the less attractive on paper option to be better long-term.

The quality of the lease has reflected in it's capital growth over the years which is significant. I think this is a topic of one of the threads on SS.

Could be so many reasons why some locations remain vacant.
1) Asking too much
2) Poorly advertised
3) Local oversupply
4) Too small, or too big

If we could identify a specific reason (such as no toilet for employees)....then that would be a handy item to add to our checklist of + and - for a CIP.

 

[Scott No Mates]

Apologies Wobbly, it should read SCM - shopping centre management.

Functional obsolescence is a major factor when considering many cip. That is they are no longer suitable for the use eg low ceiling height, inadequate roller shutter for container access, column spacing, low clearance due to roof trusses, too much/little office space, asbestos roofing, inadequate power supply etc.

The solutions posed aren't necessarily solutions but risks eg: if woolies walk who else will occupy the 2500 m2?

There's no one size fits all solution, too small and every one has got a similar property, too big and there are very few tenants capable of doing the deal.

 

[impala67]

...Functional obsolescence is a major factor when considering many cip...

Interesting point and good one - never thought about this before.

In what sort of position is the commercial/retail market this year where you are at the moment?

 

[wobblysquare]

SSM / retail obsolesence

http://en.wikipedia.org/wiki/Soft_systems_methodology

which provides a framework for users to deal with the kind of messy problem situations that lack a formal problem definition....

sadly this diversion wasn't as interesing as first thought it might be..

Good call on the functional obsolesence Scotty.

I like the Woolies when they have 15 years to run.....provided lease still ensures they gaurantee the rent should they vacate..Like woolies a lot less when lease is down to 2 years left.

With a global move to Online, do we have retail obsolesence. With commercial ventures needing wharehousing and delivery instead of retail space?

 

[wobblysquare]

Diversity

Certainly 10 spaces, in 10 different locations of 250m2 each at $300k each, is arguably better than one space of 2500m2 for $3M.

10x the work...but 10x the diversity.....and unlikely to get 10 vacancies at the same time.

 

[Scott No Mates]

I saw that woolies was selling two sites in regional Vic on 15 +8*5 options. Up your alley wobbly?

How much diversity do you want? Building up to 10 small cip is one way of doing it, another is developing the 10 but it doesn't spread your risk as they will be vacant when built.

The size of the units will come down to your preference/due diligence.

 

[Scott No Mates]

In what sort of position is the commercial/retail market this year where you are at the moment?

Anecdotally, there is alot of activity in the market compared to the previous few years both on the sales and leasing side.

I read an article today indicating that Dexus had achieved over 3% growth in rent for the last year.

 

[impala67]

Growthpoint seeks new property assets

http://www.theaustralian.com.au/bus...property-assets/story-fn9656lz-1226829777198#

SOUTH African-backed Growthpoint Properties Australia is keen to add another raft of industrial and/or office assets to its $1.8 billion portfolio after reporting an 86.9 per cent surge in its statutory profit in the December half to $63.5 million....

..."We're well placed in the market. Our properties are performing well; they've maintained a long-weighted average lease expiry of 6.6 years with 98 per cent occupancy, we've got access to capital, $157m of undrawn debt and we're ken to find more opportunities," he said...
---
CHINESE buyers are in negotiations to buy another well-known south-west Queensland cropping property for more than $36 million
http://www.queenslandcountrylife.com.au/news/agriculture/property/general-news/china-investors-eye-undabri/2688365.aspx
The potential new owner has been dealing with receivers Deloitte and could soon join the growing list of Chinese buyers who have snapped up cheap agricultural land in Australia. Unconfirmed reports surfaced that Zhejiang RIFA Holding Group, one of China's biggest textile makers, purchased several wool producing properties in Victoria's Western District.

This follows the Chinese and Japanese-backed consortium Shandong Ruyi, which purchased Australia's largest cotton farm, Cubbie Station, and late last year the Dirranbandi ginnery, owned by Singaporean trading house Olam International.

Deloitte receivers declined to comment on the sensitive negotiations with the Chinese investors.

 

[Deltaberry]

6) low volume of new stock being built
7) low ability to build new commercial space

That's not necesarilly true. Would you rather be a shop on George St/Swanston St amongst many potential new commercial developments, or some random shop in the middle of nowhere next to no one?

A big one is obviously ability to develop/expand. Can you add more floors? What rent/price would that command? People can pay multiples of what you buy it for if you have permits to build 30-40+ stories, or the ability to get those permits.

 

[Deltaberry]

I see a lot of vacancies in good locations and high volume areas in Melbourne CBD and surrounds travelling to work. I find it strange that comparable properties just a few doors down get re-rented while identical properties can't, or do and have little success and need to keep finding new tenants. While other good CBD locations remain vacant long term.

I would say the lease and a successful business is the key. There's a location that may be familiar to most Melbournians in the CBD that sold for over $5million and returns 6-7% on a long lease. The business has been there for decades. I would take that over 3+3+3 or whatever other leases in a similar location even it's a much higher yield. On paper the higher yield looks better, but experience and familiarity with this location will prove the less attractive on paper option to be better long-term.

The quality of the lease has reflected in it's capital growth over the years which is significant. I think this is a topic of one of the threads on SS.

Are you talking about Mitre Tavern?

 

[impala67]

Are you talking about Mitre Tavern?

I am...I know the site can't be developed though. What's your opinion do you somewhat agree, or totally disagree with my overall comment?