Why would anyone ever even consider investing in commercial!?!

[Williamyuan]

Apologies for the provocative title, I was hoping it might help elicit a quick response

It seems like many investors start and resi, and move into commercial when they have the experience/ capital. From looking at real commercial etc, commercial properties aren't advertised with superior yields to residential... A yields of 4%-6% are advertised.

The downside of commercial as I understand it is that they're harder to rent out, harder to sell, and are bought purely from an investment perspective rather than an emotional premium being paid by first home buyers, and can't be leveraged as much because of more conservative finance..
Upside I can see is that there are larger deals which means less management than for lots of cheaper residential properties, and if they are being under-rented, you can increase rent and increase the resale value at the same time, and value can be increased by changing use of property or subdividing etc.

What am I missing about commercial that makes it a better asset class- do the yields &capital growth tend to grow faster?

 

[Ausprop]

I wouldn't buy on that yield

 

[Williamyuan]

Or is it that commercial property yields are usually above 7% etc and the ones that are trying to be sold at 4% yields are just dreamin'

 

[Rooster]

..... yields of 4%-6% are advertised.

You need to dig a bit deeper than a quick scan of a realestate website.

Rooster

 

[Aaron_C]

Shops in Melbourne CBD get sold for 3.5% yields...

 

[HiEquity]

Your quick scan of yields leaves a lot to be desired. There's enough double digit net yields out there to go around in desirable locations if you're prepared to find them. Where the tenant pays all outgoings (often including property mgt), keeps the premises immaculately at their own expense, never calls you for anything and supplies a decent security deposit to get you through say 6 months of unpaid rent if they ever actually go bust. Of course there will always be a catch at that price - you just have to judge for yourself whether such a reward is worth the "risk"!

Just because some CIPs trade at ridiculous valuations doesn't mean they all do!

You also claim the lack of emotional involvement in the asset as a disadvantage? Quite the reverse to me... a far more predictable asset class to value on fundamentals. It's just numbers - I'm happy for others to deal with all the emotional tenants and competing buyers out there!

 

[Dazz]

What am I missing about commercial that makes it a better asset class

....I think the opposite question would be far easier to answer.....

What "you are missing" would take months to fully answer.

 

[MattADL]

Ive been looking at commercial around Adelaide and so far the yields are much better than anything I could expect from a residential.

Off the top of my head anything above 10% with tenanted paying all outgoings is a good investment. Its something I can manage myself and save again on fees.

 

[Player]

Lygon insanity

Shops in Melbourne CBD get sold for 3.5% yields...

On that theme, here's some emotion driven craziness

http://www.propertyobserver.com.au/retail/lygon-street-premises-of-donatis-fine-meats-slices-records-with-emotion-driven-$289-million-auction-sale/2012103057521?utm_source=Property+Observer+List&utm_campaign=e9433d5bb9-Commercial_Property_October_2410_31_2012&utm_medium=email



Happy seller no doubt............sold on 2.31 % yield; maybe not entirely net either


**EDIT** Link not active...........here's some text from the article:


The historic Lygon Street premises of Donati’s Fine Meats in Carlton has sold for $2.89 million at auction, with a private investor paying nearly $1.4 million above pre-auction expectations for the trophy inner-Melbourne retail asset.



The price equates to $38,533 per square metre for the 75-square-metre two-level Carlton premises, a yield of just 2.31%.

The 402 Lygon Street building was up for sale for the first time in 100 years, having operated as a butchery since the early 1900s, with Donati's based there since 1972.

Colliers International agent Jeremy Gruzewski, who led the campaign alongside colleague Tom Noonan, admitted the price paid made little financial sense, with emotion driving the bidding.

“People have been ringing me and asking if it was a misprint,” he told Property Observer soon after the October 30 auction.



The two most recent sales on Lygon Street were the 84-square-metre premises of Intrepid Travel at 231 Lygon Street, which sold for $1.9 million in July last year equating to $22,619 per square metre and a passing initial yield of 3.62%, and 163-165 Lygon Street, the premises of Casa Del Gelato, which sold for $2.8 million ($10,294 per square metre) in June 2010 on a yield of 3.48%.

In absolute terms, the highest price paid since August 2008 was $3.71 million paid for 350 Lygon Street, a two-level corner site in November 2009 measuring 173 square metres, equating to $21,445 per square metre. The shop is leased to national hamburger chain Grill’d.

The sale of the butchery premises is only the eighth sale of retail premises on Lygon Street in the last four years, reflecting just how tightly held the retail strip is, with the low yields reflecting the attraction of owning property on one of Melbourne’s most famous suburban retail strip, which is lined with Italian restaurants, ice-cream shops and cafes.

Gruzewski says emotions were the overriding factor driving the record price per paid per square metre for the butchery, which attracted a lively, 60-strong crowd and an opening bid of $1.4 million.

In total there were almost 80 bids, with three parties pushing the price upwards, before finally selling to the unnamed high-net-worth investor.

“The property generated in excess of 70 enquiries from owner-occupiers and investors looking for a well-located retail investment,” says Noonan.

“There is an enormous level of demand for retail properties of this size and within close proximity to the CBD."

Gruzewski says the purchaser plans to own it as an investment in the medium term.

“This sale re-enforces the strength of the Melbourne retail investment market, which has been driven by investors wanting to secure well-located retail properties under $3 million.

“402 Lygon Street was further evidence that there is a continued strong demand from investors to secure city fringe freehold assets with genuine value add potential.

“A sale of this magnitude begs a couple of questions. Firstly, is the confidence of Melbourne investors on the rise, and secondly, is the imminent interest rate reduction making investors look to old fashioned ‘bricks and mortar’ to place their cash? We certainly think so, on both fronts.”

 

[Trogdor]

Wow - crazy stuff Player.

 

[Williamyuan]

Looks like by 'mid term investment' he meant 'trophy'.
Yields above 10% net, with tenant paying outgoings. Ok, that answers my question.

 

[chindonly]

Shops in Melbourne CBD get sold for 3.5% yields...

But why would they buy at this yield?

Future CG??

 

[Aaron_C]

But why would they buy at this yield?

Future CG??

I honestly don't know. To get CG you'd have to get a lower yield on resale (3.5% is already super low) or a really high market-review. From what I've heard after that sale the market rent did not go up that much.

 

[Deltaberry]

Yield is sometimes a small factor in commercial. The amount of value add, additional zoning flexibility, development option could be another class depending on what you buy.

 

[Fifth]

Besides yields, potential for rezoning/development and all that fun stuff, isn't the real raisin in the muffin the low fuss-ness of commercial?

 

[Aaron_C]

Besides yields, potential for rezoning/development and all that fun stuff, isn't the real raisin in the muffin the low fuss-ness of commercial?

It's a factor rather than the real reason. At the end of the day you only buy commercial to make money. If that money is made much more easily, even better.

 

[Deltaberry]

Put another way, you can't subdivide your bottom floor in to 6 shops with a club in the basement and a conference centre on the second floor and a hotel on top with houses.