What makes for a good commercial property?

[Deltaberry]

6% yield is too low for something like Mitre. I would need 8% net to even remotely consider it. Even then it's not an asset I would want to hold.

It's purely a cashflow play; there's no value add, and you have tenancy risk. If the Mitre people breached your lease/moved on, very few people could run that place successfully and you could be vacant for a long time, very time time, as Bank Place is difficult to operate. My folks have been involved in over 50 restaurants/bars in their younger days, and I'd suspect they'd share that view.

Put it this way. I bought into something else on the other side of the CBD at the same time Mitre was selling (it was an off market deal). It had development potential, had 3 frontages, was a corner spot, not heritage listed, opposite two major CBD developments, on a famous street (think very central locations of Swanston, Bourke etc), I had a queue of people wanting to lease it from me before I even settled including 20% of the major Australian franchises you can think of. I am getting ~6% net yield (which would be like people getting 7.5% gross yield on residential).

State Trustee (which I also looked at), sold for 7.5% net yield. That's on Exhibition St, could be converted to a 10-storey hotel.

 

[wobblysquare]

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.

I would argue that the ability to add another story in downtown melbourne CBD would be tougher, than adding a second story out in the sticks?.so downtown Melbourne would have low ability to build new commercial space?.and hence would be more attractive. (I might be wrong, it might be more financially viable to add a level in downtown Melbourne CBD?.meaning this would be easier to build on)?Not thinking to be in the situation where i own an entire CBD building !!

But do think that if you know a lot of stock is being built, then this must surely impact on your rent?and hence reduce value of investment?.

 

[Deltaberry]

I would argue that the ability to add another story in downtown melbourne CBD would be tougher, than adding a second story out in the sticks?.so downtown Melbourne would have low ability to build new commercial space?.and hence would be more attractive. (I might be wrong, it might be more financially viable to add a level in downtown Melbourne CBD?.meaning this would be easier to build on)?Not thinking to be in the situation where i own an entire CBD building !!

But do think that if you know a lot of stock is being built, then this must surely impact on your rent?and hence reduce value of investment?.

There is still a lot of dead/unused commercial space in CBD. Mitre Taven and the whole surrounding area would probably be one.

CBD, like all suburbs, is a big area and one part is very different to another. Having a lot of new stock come on at say, King St or Franklin St (as is happenning now), is not going to impact Chinatown or Swanston St, which are fully built up and developed and have 50x if not 100x more foot traffic.

More importantly, it is essential to work out where the foot traffic is going and what's going to generate it. Builing a new BHP, Westpac or QIC HQ (as is happenning now or has happenned) will generate foot traffic.

Tonight is Whte Night and I am in the city in my office looking out. Everything on the wrong side of Elizabeth St is dead. There is probably less than 1000 people on the streets between Queen St and Spencer St. On the other side, there is probably 500,000 people right now (just 1/4 of Perth), if not 1 million (half of Brisbane).

 

[Deltaberry]

Picking up on my earlier post, kudos to Tourism Victoria and Denis Napthine for organising White Night. Roaring success with over half a million people in the city. All our hospitality businesses had higher turnover than NYE, with significant amounts of residents and tourists in town. Kudos to the Premier.

 

[Melbournian]

CBD, like all suburbs, is a big area and one part is very different to another. Having a lot of new stock come on at say, King St or Franklin St (as is happenning now), is not going to impact Chinatown or Swanston St, which are fully built up and developed and have 50x if not 100x more foot traffic.

More importantly, it is essential to work out where the foot traffic is going and what's going to generate it. Builing a new BHP, Westpac or QIC HQ (as is happenning now or has happenned) will generate foot traffic.

very true - been working in bourke st just off myer and david jones over last 6 months and now in Richmond for the last 1.5 months. Chinatown, Russell, lonsdale where bhp, sensis is packed on Thursdays and Fridays but in bridge road punt road, it seems like deserted. only a handful of people walking here and there.

Foot traffic helps generate more income for the shop owners.

 

[wobblysquare]

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.

Well yes and no...
Once i have a net-worth of 1M, then to borrow 2M and buy an income stream like this (at start of 15yr lease) would seem (on the surface to me) to be a good way to lock in a known return. Although i may not wait that long, as it seems as though increasing your income increases options, so these may be a great way to start.

I had thought while still trying to build up the 1M base then it may be better to look at commercial properties that have a better upside (ie ability to futher develop).

One of the things i am trying to tease out in this thread is what are some of the things to look for / avoid with CIP. The ability to develop (add value) would seem to be a big plus, but there must be lots of other little things that improve the investment - maybe they make it easier to let.

 

[Scott No Mates]

One of the things i am trying to tease out in this thread is what are some of the things to look for / avoid with CIP.

• Paying through the nose for the quality of tenant/length of tenure
• Getting above the pack of small caps but below the syndicators
• Finding sites with long term leases and potential leaves you out in the carpark until the lease/options expire unable to capitalise on the upside for many years (you may be better off with a lesser tenant, shorter lease and being able to act upon a DA in the near term rather than on the never-never plan)

 

[Nigel Kibel]

Us commercial property

Personally I really like US property but I am finding that commercial property works really well.

Look at the webinar below which is an office building purchased with partners returning 17% net and 35% cash on cash. Funding has come back so it is an exciting market

http://www.youtube.com/watch?v=KaIarcW477E

 

[Scott No Mates]

You'll need those returns if the dollar is mooted to drop back to $0.60 US

 

[Nigel Kibel]

You will need those returns if the dollar drops back

Firstly no one is suggesting that the dollar will fall back to 60 cents. Currently its around 89 to 90 cents and by years end it could be trading in the 80- 85 cents area.

In the deal that I mentioned around 60% was funded at 4.75% and the rest around $660,000 was raised by the investors. All the income is also in us dollars so if the dollar does drop to the US then you are actually better off

 

[Scott No Mates]

Firstly no one is suggesting that the dollar will fall back to 60 cents.

no one? http://www.smh.com.au/business/mark...g-benign-collapse-to-us66-20140224-33cfl.html

 

[John M]

Well yes and no...
Once i have a net-worth of 1M, then to borrow 2M and buy an income stream like this (at start of 15yr lease) would seem (on the surface to me) to be a good way to lock in a known return. Although i may not wait that long, as it seems as though increasing your income increases options, so these may be a great way to start.

I had thought while still trying to build up the 1M base then it may be better to look at commercial properties that have a better upside (ie ability to futher develop).

One of the things i am trying to tease out in this thread is what are some of the things to look for / avoid with CIP. The ability to develop (add value) would seem to be a big plus, but there must be lots of other little things that improve the investment - maybe they make it easier to let.

Hi mate,

Looks like you have a good grasp of the basic concepts of CIPs. Some pieces of advice from my experience which may help your decision making:

1) Commercial property is harder to fund (lower LVR = less leverage = lower ability to build wealth). For eg if you had $400k cash, you could perhaps buy a CIP for $1M at 60% LVR. Or you could go buy various residential properties at 90% LVR which allows you to control (and therefore benefit from the growth of) $4M worth of property. The risk is also a lot lower, the market is easier to predict and the risk of vacancy much lower. If you were to expect 5% growth pa then your $4M resi properties are worth $6.5M after 10 years (less $3.6M debt = $2.9M equity). Your $1M CIP, even at 7% annual growth is worth $1.96M (less $600k debt = $1.36M equity).

Therefore, commercial property is often used once you have a good base of equity/cash and you wish to create a nice income stream. Commercial developments are obviously an exception, but funding also becomes hard, and commercial development is also often a volatile market which requires very precise market knowledge.

2) Remember to consider the market rent of the premises you are looking at. A lot of people get caught up in buying properties with a good tenant on a long lease, however they fail to realise that tenant is paying XX% above market rent. At the end of the day you are buying the bricks and mortar, so don't get sold on a good tenant. If the tenant gets bankrupted tomorrow, you need to be able to rent it out shortly after for the same return you initially expected.

I hope these couple of things are of use to you.

More than happy to offer further general advice if you have more questions.

John

 

[wobblysquare]

Thanks for the pointers

• Paying through the nose for the quality of tenant/length of tenure
• Getting above the pack of small caps but below the syndicators
• Finding sites with long term leases and potential leaves you out in the carpark until the lease/options expire unable to capitalise on the upside for many years (you may be better off with a lesser tenant, shorter lease and being able to act upon a DA in the near term rather than on the never-never plan)

Thanks all for trying to keep me on the straight and narrow !!
- If the net yield is less than 8%, then i am not interested?.hopefully this helps to reduce the paying through the nose aspect?
- Love this point !! Great call, and i tend to agree?.thoughts on where this range is 2M to 4M ?
- agree, but depends on intention for purchased property?hold for income, or make money via actively improving asset. If intent is to maximise return then clearly (as you suggest) actively increasing return is best way to make money.

 

[impala67]

'Once in a generation' sale to raise $650 million / Ingham properties

http://www.smh.com.au/business/property/once-in-a-generation-tpg-in-massive-650m-selloff-of-inghams-properties-20140310-34gje.html
- Carolyn Cummins / March 10, 2014 - from Sydney Morning Herald

"...the owners of the Ingham Enterprises, the country's largest integrated poultry company, 'once in a generation' sale and lease back...comprise 53 industrial and agricultural properties across Australia and New Zealand..."

...surely there'd be some good returns here?

 

[Scott No Mates]

http://www.smh.com.au/business/property/once-in-a-generation-tpg-in-massive-650m-selloff-of-inghams-properties-20140310-34gje.html
- Carolyn Cummins / March 10, 2014 - from Sydney Morning Herald

"...the owners of the Ingham Enterprises, the country's largest integrated poultry company, 'once in a generation' sale and lease back...comprise 53 industrial and agricultural properties across Australia and New Zealand..."

...surely there'd be some good returns here?

Once they chop the heads off, I don't think they'll return.

 

[wobblysquare]

chickens

The draw back of some thing like this IMHO, would be what do you do if you lose your tenant?.ie govt changes rules around, breeding or processing that has a significant and detrimental impact on your client, it would appear that you have limited alternative tenants?

The other question being whether you could get it at a minimum of 8% Net + 2.5% annual increase.

Certainly interesting thank you for letting the forum know.

 

[impala67]

The draw back of some thing like this IMHO, would be what do you do if you lose your tenant?.ie govt changes rules around, breeding or processing that has a significant and detrimental impact on your client, it would appear that you have limited alternative tenants?

The other question being whether you could get it at a minimum of 8% Net + 2.5% annual increase.

Certainly interesting thank you for letting the forum know.

8-12 % net and more is realistic and achievable. There'd be some good deals in this sell off, and the Shell one. However the limited tenants is a strong point, and that would be the big risk.