Prosper Group is Sydney's and Brisbane's leading property buyers agent, specialising in sourcing residential and commercial property.
Commercial Property encompasses investments such as Offices, Retail, Industrial and Hotels.
Investors should consider:-
• Which type of commercial property investment will suit
their portfolio?
• What risks they are prepared to take for a higher return?
Prosper Group is Sydney's and Brisbane's leading property buyers agent, specialising in sourcing residential and commercial property.
Commercial Property encompasses investments such as Offices, Retail, Industrial and Hotels.
Investors should consider:-
• Which type of commercial property investment will suit
their portfolio?
• What risks they are prepared to take for a higher return?
• Will higher yields deliver higher returns?
Type of tenant:
Properties with less established, small tenants may offer investors higher yields but there is a downside. A six month bond would be appropriate for a property with a smaller tenant. I.E. if a tenant defaults or cannot pay, it may take 6 - 12 months to replace them.
Lease term:
Expectations are that Investors buy commercial property on a higher yield to compensate for a shorter lease term. (I.e. to reflect the risk of a potential vacancy should the tenant leave).
On the other hand, if market rents have increased since the last rent review, there may be an opportunity to increase the rent at the expiration of the current lease term.
In this case investors may be more receptive to buying the property on a lower yield and a shorter lease term, knowing that they can increase the rent in the short-term and therefore benefit from an increase in the property's value.
Supply & Demand:
A commercial property may offer a higher yield if there is an over supply of new property. Increased supply means tenants have more properties to choose from which may cause rent to reduce in the long term. Landlords may then offer incentives to attract tenants. This scenario may reduce the value of your property.
Properties in remote areas which lack proximity to infrastructure and transport nodes or have inferior exposure may be bought on higher yields (to reflect the potential longer vacancy periods should the tenant leave).
Age of the property:
Older properties often require more ongoing maintenance and may therefore offer a higher yield to the investor to compensate for the extra costs. These extra costs can erode an investors return if there is not an accurate forecast. A detailed inspection and expenses forecast by a facilities management company can help mitigate the risk of underestimating future costs.
Lease structure:
Often with commercial property the tenant will pay for the outgoings. However, it is important to have your solicitor review the lease thoroughly to ensure that there are no surprises.
Smaller tenants will usually not cover outgoings such as land tax, management fees and replacement costs of a capital nature. For strata properties also check who pays for the gardening, rubbish removal and toilet cleaning etc.
Cost of vacant property:
When a property becomes vacant there will be interest costs to pay. To attract a new tenant you may also have to offer incentives, such as a rent free period and/or a contribution to their fit out.
Typically incentives can equate to 6 months per 5 year lease term. So if it takes 6 months to find a tenant, you may have to add another 6 months worth of costs to this to get the tenant in the property.
Properties with higher rental returns (or yields) may or may not always provide the best overall return. In our experience many commercial properties for sale fail to mention the hidden costs too.
It is up to the buyer to spend time and instigate a thorough due diligence or employ professionals to do this on their behalf.
If you would like information on how to Create PROSPERity through Commercial Property contact PROSPER GROUP - the No. 1 Commercial Property specialists in New South Wales and Queensland.
