What yield is expected on commercial property?

What % yield would the buyer of a commercial property consider to be reasonable at the moment? We are thinking of offering the freehold of the property that we operate from, for sale, with us leasing it back, and wonder what sort of rental we would have to offer to make it feasible for a potential buyer. Any comments much appreciated.
 
The rule of thumb used to be around 10%.

So if you were getting $50K rent, the property val was $500K.

I'm not a commercial property specialist, just resi these days - so I might not be current.
 
10% seems very high to me, especially compared to residential at the moment being mostly under 5%. If you can get 10% return on commercial, why would anyone bother with anything else?
 
You expect a higher return for commercial because of vacancy risk. For me, below 10% means you have to be very sure of the longterm tenant and their viability or of the desirability of the property. For me over an 8 year period I held a commercial property, i had 1/4 vacant for 2 years from purchase (half had been vacant for 3 years before that), four years after purchase I had 1/4 vacant for a year, ayear or so after I had half vacant for a couple of years and the other half became vacant for the last year of that. I could afford that because after expenses I was netting 17% when fully let.
 
Risk versus Reward

10% seems very high to me, especially compared to residential at the moment being mostly under 5%. If you can get 10% return on commercial, why would anyone bother with anything else?


Unless one has oodles of resi equity to draw upon to fund a commercial purchase themselves without bothering a bank/lender (and the requisite hoop jumping to secure comm finance), then one needs to strike a balance between the risk/reward pay-off of following the commercial road.

That said, there are many who do well with commercial IP's; have done in the past and will do so in the future. Bear in mind however that the conservative LVR's that a bank/lender is likely to apply in this credit climate will at least partly dictate how one strucutres the deal, and if they can get it across the line. :(

Of course in relation to Pembroke's question the expected yield or cap rate will depend on where the asset is and what type of asset it is.

Difficult to give a generic answer without knowing location and the calibre of the asset. :confused:

10 % is a nice number, however in this market, at least I am finding that to achieve a higher yield, one needs to be looking at assets in multiples of seven figures and possibly into eight figures, and with decent sitting tenants.

More common (and affordable to entry investors) CIP's are hovering anywhere from 6-8.5 % (in Melbourne) for industrial and office. Retail even worse; less than resi yields and with far more risk. Difficult to achive +ve CF on those returns.

Pembroke, if you're happy to share approximate location and size/calibre of asset (land and box) perhaps your question may be answered a little more specifically.

I would also ring comm agents in your area (at least three or four) and get an idea of cap rates. Take an average and verify everything yourself. Also look at what lease rates are in your area for similar types of assets and what they go for per sq m.

www.realcommercial.com.au

www.commercialrealestate.com.au

Those sites may help as a start.

Obviously as a seller Pembroke, you would want the cap rate to be as low as possible to gross up the rental to achieve a higher capital value for your property. Be careful however that you don't get too greedy and scare away any potential purchasers. I've seen quite a number of properties on the market at present that started with such a ridiculous asking price that they are now ignored and despite price drops (even with number of hits counters reset), they are very very stale......on my watchlist for a bargain basement buy ;)

If you're happy to share some more info perhaps others could also give their input. As a generic question however, my two cents is stated above.

Good luck :)
 
wouldnt touch much under 10% theres cip around 10-13% atm not in the brisbane cbd of course but elsewhere banks do make you jump through hoops which is a huge bother rather then a resi that money pretty much gets thrown at you to buy resi more of a risk in commercial tenant going out of biz etc.
 
What % yield would the buyer of a commercial property consider to be reasonable at the moment? We are thinking of offering the freehold of the property that we operate from, for sale, with us leasing it back, and wonder what sort of rental we would have to offer to make it feasible for a potential buyer. Any comments much appreciated.

Get advice from a local commercial property agent - yield will depend on - the type of property, location, condition, your companies financial strength, rent and other lease terms, prevailing market conditions etc, etc.

I wouldn't have thought it a good market for sale and leaseback.
 
Another "how long is a piece of string?" questi0on.

Government tenant vs Top 50 ASX company Vs 100 year old well capitalised company vs 10 year operator with history vs new mom and pop operator.

Passing rental at market, above market or below market?

How long to next market rent review?

How long is the lease? is is month to month, 2 years to run or 15 years to run?

Is there a make good clause and how strong is it?

Is it a premium grade,A grade, B grade C or D grade building.

What is the clearspan like if it is industrial?

How big are the floorplates?

Is it single tenancy, multi tenancy or or there numerous tenants per floor?

What are the lift speeds and what conditon is the aircon and heater in.

Is the parking adequate?

Are we talking a $1bn building, $300m building, $100m building; $50m building - institutional investor class or a $5 million building, $1 m building or sub $1m .. the realm of the less than knowelgable investor?



These are just a few of the variables that you need to consider when determining wether or not a yield is adequate.

there are plenty more.

A yield needs to reflect the risk for the return.

cheers

RightValue
 
i say if you can't find 10%, look at the next area.

people focus so heavily on investing in their own backyard, when the deals may not be there.

someone i know bought in Forrestfield 30 years ago, when it was bush and wasteland and dodgy single lane bitumen road with gravel shoulders - but the airport, highway, freight line and new highway were all close by.

needless to say, he bargained and got a good deal at the time. netted him 11%, 30 years ago, paid cash for the site.

sure, not all of us have 30 years' hindsight, but this deal now holds about 10mil equity because of it's.....location...whereby 30 years ago, no one was buying it because of its....location.

i guess that just drummed it home for me - use your common sense.
 
Our family has several buildings in the CBD. Definitely will not get anywhere close to 10% in the CBD. You might in suburban areas or maybe even inner city suburbs, but we never buy commercial buildings there as we're too weary of the vacancy rates and growth once it's outside the CBD. Even outside the main streets of the CBD, we're cautious. Would much prefer residential if we move outside the CBD
 
hi
this is not a piece of string this is can you find me the string and have no idea what colour it is
yeild on commercial
what commercial
where
how big
and how long Ie what the lease.
are you buying the lease or the property
commercial
is a very loose term
it can be a cigarette booth of 4 square or even an atm in a wall
to a 20 storey single building. or even a couple on million acres or farming all are comm and all have very different yeilds.
to get a cap rate yield of what you are asking is simple
find out what comm it is.
say shopping centres
then ring cbre selling agents and ask for there listing of shopping centres
and in the paperwork you will see a cap rate
and that cap rate is what they are selling it for
now that is not the normal cap rate but it does give you a good range

agent do like to sell on a higher cap rate(why you may ask except to get in suckers but it does tell you what they see as a cap rate)
10% cap rate on any and all comm is a very good call just not one I would do.
as tehre are around the 7 to 8% for inner city floor space but some are down to 6.5 to 7% is blue chip and I don't even look at those.
it will depend what you site is and the lease will decide the end value or sale price
bit hard when the seller is going to be the tennant as it has to be arms lenght
there is a way of doing that but not for a board and agent can do it
 
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