Am I Missing Something?

Discussion in 'Commercial Property' started by gty12, 1st Aug, 2018.

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  1. Beano

    Beano Well-Known Member

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    I wish the answer was that simple
    Commercial is driven by the strength of business and supply/demand ...and the wide range of commercial properties all have different drivers
    Changes in consumer taste has affected certain commercial property demand
    But to answer your question
    1: yes I believe residential prices will fall relative to rents
    2: no most commercial rentals are not undervalued . In fact I believe commercial rents are too low as the seldom cover depreciation/obsolescence
    People buy building thinking they never will become obsolescence
    3:I believe both residential and commercial are generally over priced where the land is a small component of the purchase price
    Depreciation and obsolescence of buildings need to be factored in.
     
  2. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    Risk v reward is a factor of economics.

    A higher risk commands a premium. Cash is considered risk free and produces 0% income. Then short term reserve bank official cash (1.5%) and so on rising as we go.

    A commercial property with a long lease to a Govt dept would be low risk and not command a rent premium. A run down dump with a month by month lease to Fred the Mechanic who cant afford a lease bond etc gonna be a whole lot higher.
     
    Last edited: 14th Aug, 2018
  3. Beano

    Beano Well-Known Member

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    Note : Yield compression is a increase in price
     
  4. Cousinit

    Cousinit Well-Known Member

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    Can you give some good examples of commercial buildings that become obsolete that you have experience in and what lifespan ? Heavy industry must be a hard one . Have you had tenants that have added value to your buildings on their own ?
     
  5. Harry30

    Harry30 Well-Known Member

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    I always make an additional point when people are debating about whether asset A (in this case residential) is better than asset B (commercial real estate). Markets never stand still, to the extent one investment is better than another investment, the relative asset prices will adjust over time. And when I say a better performing asset, this is a question of risk and return. Does the asset sit higher on the risk/return plane than the other asset. If asset A is superior to asset B, the price of asset A will increase relative to asset B as investors move their money into the better performing asset. Prices get bid up. This adjustment will occur until these opportunities or ‘excess profits’ as economists like to call them get eliminated. Superior investment opportunities don’t last long in deep markets. This is particularly the case in stock and bond markets, but also relevant when thinking about residential and commercial real estate. The counter argument is that the market has mis-priced the asset, and the investor sees an opportunity that the rest of the market doesn’t (and hence is not properly reflected in the price). In the stock market, the data is overwhelming. Investors trying to identify mispriced stocks (active managers) rarely beat the index. Fewer than 5% if you take a years data, and fewer than 1% if you look at performance over 5 years.
     
  6. Beano

    Beano Well-Known Member

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    Go to the museum and look at any city in the world
    Go back 50yrs
    Go back 100yrs
    Go back 150yrs
    Tell me how many buildings are still in everyday use
    Tell me how many have been pulled down
     
  7. The Y-man

    The Y-man Moderator Staff Member

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    Brought back memories..... :D

    The Y-man

    Fed square 1970s.jpg
     
  8. The Y-man

    The Y-man Moderator Staff Member

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    The building shell might be ok, but it will degrade from a Class A > B > C as time goes on without a refurb of common areas, lifts etc.

    eg 1 Nicholson in Melb is an old (hertiage registered) building but has been refurbed recently (at landlord's costs). Unfortunately, some other issues related to its age reared its ugly head during the renos and costs have gone overboard.

    The Y-man
     
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  9. Beano

    Beano Well-Known Member

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    Yes you hit the nail on the head
    Buildings depreciate and age (just like we do)
    Eventually they are a liability (just like we will be)
    Buildings have to generate massive income before they become obsolete (just like I will be)
    The value is in the land
    I learnt this lesson only recently
    Wish I learnt this when I was a teenager !
    (Every year I spend hundreds of thousands of dollars to keep the buildings in good shape to maintain income)
    As the years goes by the buildings do not utilise the land fully eventually becoming a liability by preventing the land be used for "its best and highest use" . That is when the building should be removed
     
    Last edited: 15th Aug, 2018
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  10. gty12

    gty12 Well-Known Member

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    Yes that is the whole point behind VIC land tax, people with one storey retail shops being charged ginormous land tax bills because the highest and best use of their land is a five storey mixed use building. Having said that I would argue the land component is of lesser importance in commercial zoning, as less demand for the asset than residential & less important to a commercial tenant (most of the time valued on floor area per sqm not land area per sqm).
     
  11. gty12

    gty12 Well-Known Member

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    Slightly pessimistic there Beano.
     
  12. Scott No Mates

    Scott No Mates Well-Known Member

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    Advances in technology bring on obsolescence. Consider an A grade building in the CBD. In the 1970's you had basic services - fluoro lights (no diffusers), single zone air conditioning (or natural ventillation), columns at 6 m centres, small windows, PMBX/PABX (switchboard), desks/offices.

    1980's fluoro (prismatic diffusers to reduce glare on computer screens), fax machines, columns at 8 m centres, curtain walls, PABX, decline of telex.
    1990's Ergonomic lighting, work stations, zoned air-conditioning, larger floor plates. P/T reception.
    2000's Break out areas, open plan office space, smaller work stations, DAS/IBC, fibre, redundant copper services, no reception/intercom.
     
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  13. The Y-man

    The Y-man Moderator Staff Member

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    2010's - LED mood lighting (colour change for different floors/time/sections), (strong) air con in comms rooms often now doubling as server rooms (and data cabling trays and risers to match for carrier termination points)

    Also:

    As per resi - finding asbestos in toilets is normal when renovating, but in the HVAC is a much bigger issue.

    Lead (and other metals) in water (old tanks/pipes).

    The Y-man
     
  14. The Y-man

    The Y-man Moderator Staff Member

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    1. Lot of vic com 1 zones have mixed use resi (shop/apartments on top)
    2. I know people who buy commercials specifically for land value - eg childcare centres on big land, inner city. They are usually built in/next to resi zones anyway.

    The Y-man
     
  15. Scott No Mates

    Scott No Mates Well-Known Member

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    In the industrial landscape, changes have included containerisation which has driven the need for improved access (high shutters, truck access), land prices have driven the need to change from saw-tooth roofs to flat roofs with 6 m clearance. Super-flat floors and racking systems have pushed this to 10-12m high roofs being up to 100% increase in volumetric storage. Larger column free space providing for better racking systems.

    Lighting has changed from Fluoros on chains to highbay metal halides and now LED highbays.
     
  16. gty12

    gty12 Well-Known Member

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    Hard part with commercial here is: that you know with residential one can update it himself/herself fairly self-explanatory and a lot of the time DIY-e.g. replace an old toilet. But commercial updates=well industrial air-conditioner changes-that is beyond me and most people's DIY I would say.
     
  17. lettert

    lettert Well-Known Member

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    I’ve met one investor who’s had success with this approach (2) but curious to learn more- any tips on due diligence for these, the kind of upfront rental yields and prices etc? What do they tend to convert to or do they tend to get plans/permits done and then sell?
     
  18. The Y-man

    The Y-man Moderator Staff Member

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    Never tried it myself, so couldn't tell you the DD, but their aim was to go to subdivide for resi. This is some years ago but they went for commercial props on large blocks of land that were able to be made resi in the future (some of them were rezoned from resi to comm at some stage in the past anyway). I recall at the time, they were looking at yields of 10~14%pa (depending on the deal) on $2~5m deals.

    They haven't got to the stage of selling/splitting any yet, but they did do a JV buying a petrol station which they converted to retail with apartments on top (apparently an interesting exercise in decontamination that was!)

    The Y-man
     
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  19. Scott No Mates

    Scott No Mates Well-Known Member

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    That's a big risk and expense when buying a servo or ex-servo. To be stuck with the remediation costs to a residential standard as opposed to an industrial or open space standard.

    It has become the norm to treat the soil on-site as tipping is no longer a viable option in many instances.
     
  20. Piston_Broke

    Piston_Broke Well-Known Member

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    I have one, 2 floor office. Gross rental return is a bit over 7%.
    Small CRE is more stable than higher priced, and the returns reflect it.
    Once you go over 2mil 10% is low blue chip.
    Good deals can be had 2-5mil cause the it's "no mans land" for the banks who don't want to finance it.
    I have seen CRE halve its value, then quadruple, then halve again, then end up with a 60 unit block in about 25yrs.
    Years ago I was too slow in buying an office building that cost 8.5mil to build and sold for 3.5mil just a few years later.
    There are still a few buildings around the burbs that are worth a fraction of what they cost to build.
    Very risky and only for deep pockets.
     
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