Buying a commercial property can be a daunting process. When assessing the suitability of a commercial property to occupy or invest, there are a number of factors you should look at. Our Commercial Property Buying Guide briefly covers these key considerations;
RETURN
Return is the key investment fundamental and will always be considered against other investment options such as term deposits or shares. While immediate return through rent collected (yield) is an obvious factor, it is important to remember that good property provides strong capital growth longer term.
Generally speaking, the stronger longer term capital growth and upside a property has, the lower the yield will be as the balance of the total return is derived through capital growth.
Properties which occupy prime locations with limited vacancies and strong historical rental growth will sell on lower yields, for example retail shops in Glenferrie Road, Hawthorn typically sell on yields of 3-4%. Properties in areas which have historically not experienced strong capital growth and have a large supply of available stock will sell on higher yields, for example industrial property in the outer suburbs often sells on a yield of 7-8%.
Total return is also affected by other factors such as any capital works that may be required if the tenant vacates.
LOCATION, LOCATION, LOCATION!
A popular phrase and indeed a very important factor to consider when looking at purchasing commercial property. Access to public transport, major roadways and car parking is crucial.
Car parking is particularly important for office and retail properties. An office building should provide ideally around 3.5 car spaces per 100m2 of floor area. If not, ensure there is ample free surrounding parking that tenants can utilise. A property well serviced by public transport will often get away with less parking – CBD properties being a good example.
Another important location related consideration is the current vacancy rate in the immediate area and surrounding suburbs. For example, if there are numerous offices available for lease in the area, then you can generally expect an office will take longer to lease and that tenants will typically look for the most competitive deal.
LEASE COVENANT
Put simply; the quality of the tenant and structure of the Lease.
Consideration must be given to the calibre of tenant, how their use compares to the immediate surrounding uses, competition from surrounding businesses and their Lease terms.
Lease structure is important. Obviously as an investment you want a long term lease to a good tenant, but there are other factors to keep in mind such as;
- Length of lease term and any options
- Type and frequency of Rent reviews (CPI or fixed percentages)
- Frequency of market reviews (ideally prior to each option and midterm if the initial term of the Lease is longer than 7 years)
- Security (bank guarantee or personal guarantees)
- Makegood clauses (what is required by the tenant when they vacate)
DEVELOPMENT POTENTIAL
A property with development upside will normally sell on a lower yield given that the value of the property is held within the land, ie there is a higher and better use of the land outside of a passive investment.
You should also remember that the ability to develop is affected by Lease structure. If a property is subject to a long term Lease with no demolition clause in place, then obviously you cannot cash in on the development potential until the tenant vacates.
COMPARABLE RECENT SALES/ LEASING EVIDENCE
Regardless of the asking price, true market value of a property can only be determined by comparable sales and leasing transactions. So do your homework.
This Commercial Property Buying Guide is intended as a brief guide only. Obviously, each property offers a unique opportunity and should be assessed on an individual basis. We would be delighted to assist you with the process of purchasing, managing or selling your commercial property.