Forum Replies Created
Always better if you are not a 'motivated seller'.
Good for you on being able to hold.
Best wishes
Chris White | Pillar Property
http://www.pillarproperty.com.au/
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Tye mate,
I think I know why the other sales fell over. 7% cap rate for a three lease in Wodonga is way off the mark.
Maybe 8.5% – 9%+ would see some interest in your property. There is also the three year 'leaseback' scenario that would concern many buyers. I guess you guys could easily move on and/or build another factory for yourselves at the end of the short lease term.
All commercial properties are cash flow positive at the moment.
How about a 10 year lease with a 6 month bank guarantee at 9% + GST + outs. I may be able to do something with that.
Chris White | Pillar Property
http://www.pillarproperty.com.au/
Email Me | Phone MeThe Property Investment Specialists
G’day Michael,
There are certainly some areas with a lot of unsold and unleased stock. This applies to various areas of Sydney and Brisbane; I am not as familiar with Melbourne.
I would certainly not be buying a commercial property at the moment unless it came with a long lease (5 – 10 years), has a 6 month bank guarantee (bond) in place and I can find out enough information about the tenant, their business and stability to feel confident that they are traveling ok. The 5 to 10 years depends on the specific areas current or looming supply situation and what kind of market reviews and lease terms apply. For example; a seven year lease to a national tenant, with 3 – 5% fixed annual increases and a ratchet clause (rent cannot decrease) may be sufficient to ride out the current bumps in the economy.
Unsold and unleased stock in any area will put downward pressure on capital values and rents. As with an oversupply in residential, the more motivated owners reduce their sales prices and rents to facilitate a transaction rather than keep the property on their books vacant or unsold.
In many areas there is an oversupply of smaller strata industrial units or sheds. I see this as quite risky at the moment as these will be harder to sell or lease. (I.e. < 400 – 500sqm)
Sydney industrial sector has approx: 5 – 6 regions. The outer west region (Erskine park and surrounds) has the most industrial land available to be developed however, most developers at the moment want tenant pre-commitment before they start building and certainly their banks demand this, even for established developers with a sound track record. (So minimal spec developments going forward). There is more of a glut of older stock for sale and lease in the central west (Smithfield and surrounds), I would be very careful around there.
I agree that the commercial cycle has traditionally followed the residential property cycle; a buoyant commercial property market relies on a buoyant economy. If there is a lot of a residential construction going on, then in turn, manufacturing, warehouse and distribution companies expand and need more space. Also new residential construction causes a demand for shops, places to work and other infrastructure etc.
Catch 22 at the moment, you want to buy when things are low however, you do not want to buy a commercial property only to have it vacant for a year or so if the tenant goes bust. Also you do not want your rent to go down at the next market review as may happen if there is a glut of properties around and rental rates have been forced down.
Whilst we may not move into an upward cycle for a couple of years, the financial crisis is causing some vendors to sell at very low prices. This coupled with there being few willing buyers in the market at the moment is presenting some good opportunities.
Generally with commercial interest rates at around 6% and net yields at around 9% (more for some and less for others) there is good scope to buy commercial property and achieve a very good positive cash flow.
There are many factors and scenarios to consider on a case by case basis.
Happy for you to contact / call me directly if you want to run a few specific scenarios past me.
Chris White | Pillar Property
http://www.pillarproperty.com.au/
Email Me | Phone MeThe Property Investment Specialists
Hi Michael,
My research and also being in the market tells me the following;
With the economy slowing the demand for commercial and industrial space is easing. Many companies are putting expansion plans on hold and staying where they area. A lot of completed speculative development is therefore sitting around empty causing an increase in vacancies. Vendors are looking for tenant pre-commitment at present before commencing development.
Lease rates will likely stay level to moderately increase over the next couple of years unlike the big increases of the last few years. Cap rates are rising however; sales volumes are thin so in many cases there is little real sales evidence to support any major softening.
There is more discounting at $2m+ as the larger property funds are deleveraging are need to rebalance their portfolios.
Sydney commercial – Most research reports will tell you that cap rates are 7 – 8% however, having a couple of deals on the go at the moment ourselves at 8%+, I dare say that the sales evidence will shortly support 8%+ as where yields are.
Sydney Industrial – Research papers are reporting 7.5% – 8.5%, we just contracted on a prime industrial, international tenant, 7 years to go out of 10 years on the lease at 9.4% net return, so again cap rates are moving.
The same for Brisbane Industrial, over the 9% mark now. Brisbane office is still on the watchlist as it has been too hot recently to touch however should come back a bit now.
Finding the deals isn’t easy though; some of them are off market as these vendors do not want the spotlight on them or what they are selling.
Good to time to buy well in these sectors for well capiltalised investors with low gearing. I suggest good solid tenants, long leases and prime locations as the way to go.
Chris White | Pillar Property
http://www.pillarproperty.com.au/
Email Me | Phone MeThe Property Investment Specialists
You are in the wrong section.
This post is on commercial property.
Chris White | Pillar Property
http://www.pillarproperty.com.au/
Email Me | Phone MeThe Property Investment Specialists
Sorry about the late reply Heidi, I have been traveling for a few days.
I guess the first step is to identify and maybe separate your business needs and requirements from your property investment objectives.- Is the property a good investment
- Does it suit your business requirements – having a reliable tenant (yourself) is a plus however, the property should still represent good investment value.
I am assuming that it does suit your business premises requirements so some of the investment considerations are;
- Should you look to lock in the potential tenant prior to completing the purchase?
- Is the property attractive and suitable to tenants – what would be the lease up time?
- You need to allow agents leasing fees for finding new tenants (say 15% of the gross annual rent for that particular tenancy)
- Will money need to be spent improving or fitting out the property (for yourself and/or incoming tenants)?
- Will the tenants pay for this or will you?
- What rent can you charge them for the property – is this at market rates?
- Can you buy the property at a discount as it is vacant and generate uplift when you lease the property up?
- Will the heritage listing prevent any such desired improvements or indeed make them more expensive?
- What other restrictions or costs does the heritage listing mean for the property?
- Will the leases be gross or net lease (i.e. who will pay the outgoings, you or the tenant)
- Have a boundary and/or internal area survey done to firm lettable area etc.
- Check the structural integrity of the property and a/c system thoroughly. Depending on the size of the property you could pay a facilities management company to do a dilapidation report (which includes 10 projections on the expected lifespan and CAPEX requirements of the buildings fixtures, fittings and equipment).
- Check zoning and allowable uses.
As you get through this let me know as side issues will probably pop up?
This could be a good case study for the forum.
Chris White | Pillar Property
http://www.pillarproperty.com.au/
Email Me | Phone MeThe Property Investment Specialists
Hi, yes got your e-mail and sent a reply however it bounced back to me twice – not sure why?
Do you have another e-mail address?
Chris White | Pillar Property
http://www.pillarproperty.com.au/
Email Me | Phone MeThe Property Investment Specialists
Do you mind sending me an e-mail [email protected] and I will respond with suggested reading.
I would prefer to refer books privately.
Thanks
Chris White | Pillar Property
http://www.pillarproperty.com.au/
Email Me | Phone MeThe Property Investment Specialists
You definitely need a buffer when investing in commercial property. You need to be able to ride through potential vacancy periods and/or capital costs (especially with older properties).
I am sure that most commercial investors will agree that 'right now' I am seeing some of the best buying opportunities for several years. I expect this to continue for the next 6 months.
Good commercial assets that are being sold on great yields from motivated vendors do sell quickly though.
My advice is to spend as much time as possible getting across commercial property so you will recognise a deal when you come across it.
See some commercial case studies – yields are pushing to 9% now for good properties
http://www.prospergroup.com.au/commercial-property-buyers-agents-case-study-sub.html
Chris White | Pillar Property
http://www.pillarproperty.com.au/
Email Me | Phone MeThe Property Investment Specialists
It seems that rates are on the way down. A 0.5% – 0.75% rate cut next month is not out of the question.
I can't see rates moving up for at least another 6 months. Unless you absolutely need the certainty right now, I would stay variable for a couple of months more.
Most lenders allow you to fix at any time. (some charge a small fee).
Chris White | Pillar Property
http://www.pillarproperty.com.au/
Email Me | Phone MeThe Property Investment Specialists
Stu_Macca
It may be the conservative in me, (and I don’t buy in mining towns), however, when house prices there reached $350k I thought it was overpriced.
Be very careful when riding a bubble (and prices in Moranbah) are just that. The intrinsic value is not what you paid for it.
The cash flow is great but what is your medium term plan and exit strategy?
Don’t be the guys holding the bag at the end of the line.
Chris White | Pillar Property
http://www.pillarproperty.com.au/
Email Me | Phone MeThe Property Investment Specialists
Sorry, I was asking Wealth4Life how they get paid from their arrangements with property developers.
i.e. does the developer pay them or do they act on behalf of the purchaser (therefore the purchaser would pay them for the service)
Just curious to know?
Chris White | Pillar Property
http://www.pillarproperty.com.au/
Email Me | Phone MeThe Property Investment Specialists
How do you get paid?
By the developer / builder or purchaser.
A buyers agent represents the purchaser to acheive the lowest possible price for them.
Just to clarify, who will you be representing?
Chris White | Pillar Property
http://www.pillarproperty.com.au/
Email Me | Phone MeThe Property Investment Specialists
Hi Katrin,
Feel free to give me a call to discuss how we can help you.
Please also view our website.
Chris White | Pillar Property
http://www.pillarproperty.com.au/
Email Me | Phone MeThe Property Investment Specialists
Hi Damian,
Feel free to give me a call to discuss.
Chris White | Pillar Property
http://www.pillarproperty.com.au/
Email Me | Phone MeThe Property Investment Specialists
You’ve pretty much summed it up whiteknightoz
- On a $300k loan, at 0.80%, repayments will reduce by $200 per month
- The banks will reclaim some of their lost margin (i.e. 0.20%) previously lost in higher funding costs and therefore restore confidence.
- Interest rates will fall further and the banks margins will continue to improve.
- Median house rents have increased (in Sydney and Brisbane) by over 30% since July 2005 and are forecast to increase by another 30%+ over the next few years.
- More cash flow negative investors will be become cash flow positive as loan repayments decrease and rents rise.
- International immigration is at 19 year highs putting further pressure on housing.
- Those unfortunate enough to be forced sellers (due to mortgage stress) are now renting and are placing further pressure on housing and forcing rents up. For example rents increased by over 17% in the South West of Sydney over the past 12 months due to this reason. Houses prices in the same region increased by a modest 2%, however still positive territory.
- BIS shrapnel forecast approx 20% growth in property prices over the next 3 years and I agree with them.
- Those buying well, adding value and are educated will do much better than these averages.
From someone that is buying properties below bank valuation and increasing the rent after improvements then benefiting from additional market rental increases, it is a great time to buy property.
Chris White | Pillar Property
http://www.pillarproperty.com.au/
Email Me | Phone MeThe Property Investment Specialists
They are good additional points that you raise.
If you were going to spend money on a fit-out you would certainly want to be confident that your tenant was going to be there for the long term and/or you retained the ownership of the fit-out, depreciated it and could even leave the works in place for the next tenant to use. As such the nature of the improvements would have to be appropriate.
A fit-out (term used in the broad sense) could include a/c, floor coverings, paint etc, so the ownership could be retained by you and be depreciated.
Appropriate research would need to be done to ensure that the capital expense was not wasted and certainly you would not want to ‘kick the can for $50k’ and have your tenant leave in five years and not be able to re-use the fit-out.
We always consult with local valuers to get a ‘projected valuation’ before undertaking any such exercise. You don’t have to guess with commercial property, you can negotiate any works ‘subject to’ adequate terms and rent and also ensure that your uplift in value will allow you reuse equity and/or sell your asset for a profit.
My 2nd example of $200k profit would work better for this.
Commercial property is certainly not for the inexperience and I would suggest a lot of research before investing in it for the first time.
Our due diligence checklist has over 40 check points on it; many years of buying commercial property teaches you a few things.
Chris White | Pillar Property
http://www.pillarproperty.com.au/
Email Me | Phone MeThe Property Investment Specialists
Your post doesn’t make a lot of sense.
You make it seem like there is a conspiracy theory out there that only you know about.
I would like to see more fact behind these posts. A little information is dangerous.
There is a lot of money being made whilst you continue to wait for property prices to fall 50%.
Chris White | Pillar Property
http://www.pillarproperty.com.au/
Email Me | Phone MeThe Property Investment Specialists
As far not being the right time to invest – I disagree.
Injections of capital into banks and other corporations will help the current economic turmoil. (Which is currently occurring) and right now, the greatest investor in the history of the world has spent US$15 billion on investment within the last week and is set to spend another US$25 billion in coming months. He has invested heavily in General Electric, Goldman Sachs and Constellation Energy, in addition to huge investments in Wells Fargo Bank and US Bancorp. Yes, the world’s smartest investor is ploughing billions into the US banking system! Is he crazy? Yeah!… like a fox. Warren Buffett knows exactly how this will play out.
History has shown it is possible not only to survive — but to prosper — in these times.
During the great depression, huge fortunes were made by many. The Kennedy, Rothschild and Rockefeller families all dramatically increased their fortunes throughout the depression. But it wasn’t just the rich who got richer — many ordinary citizens found a way to not only survive but thrive during a poor economy.
Aussie banks profit from credit crunch
“The average profit margin for the major banks was 54.8 per cent in the March quarter, more than double the long-term average return of 26.9 per cent, according to official figures from the Australian Prudential Regulatory Authority. That equals more than $1 profit for every $2 in interest and fee income charged.Currently I am seeing (and buying) some absolute bargains out there in the property world. If now is not a good time – I wouldn’t know what was!
Chris White | Pillar Property
http://www.pillarproperty.com.au/
Email Me | Phone MeThe Property Investment Specialists
“Say you offer to pay $50k in fit-out costs for an incoming tenant or existing one, and the tenant agrees to pay an increased rent of $25sqm x 250sqm (of floor space) = $6250 per year. At a capitalisation rate of 8% the increase in value would be $6250 ÷ 8% = $78,125”.
Hi Gary,
The $28k is the difference between what you spent on the fit out ($50k) and the uplift in value ($78k).
So the return on investment (ROI) is $28k ÷ $50k = 56%. Not a bad return for about a months work. Obviously, this increase is ‘equity’ as opposed to cash.
To understand how you increase the value of commercial property you need to understand the capitalization method of valuation or income method.
I can explain this in further detail if you want me to?
Chris White | Pillar Property
http://www.pillarproperty.com.au/
Email Me | Phone MeThe Property Investment Specialists
