Capital Growth in Commercial Property, Prediction Question

Discussion in 'Commercial Property' started by Justin_mo, 27th Mar, 2019.

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  1. Justin_mo

    Justin_mo Active Member

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    I am very new to commercial property and doing research.

    When investing in commercial property is there a way to predict capital growth easily, in the same way you would for residential property?

    Is it easy to look at median price and past sales etc and hence certain areas are better for capital growth I assume?

    Also do many investors aim for capital growth primarily as opposed to rental return / yield when buying commercial?
     
  2. Scott No Mates

    Scott No Mates Well-Known Member

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    Commercial property is 'clunkier' than residential, that is usage, design, functionality, accessibility play a major role so valuers do not use direct comparison for their purposes. Capital growth is more closely aligned to economic conditions, business sentiment, supply & demand than the Marlow hierarchy of needs.
    • Median prices mean zip, value can be affected by whether the premises is vacant or occupied, the quality of tenant, length of lease - all totally irrelevant in residential property. Zoning, fsr, height, volume play a larger role.
    • Capital value is directly proportional to rent. Calculations are done on the basis of nett rent/rate of return (aka cap rate). Gross rent means zip as it's not comparable between different assets. The market determines rent, analysis determines your cap rate.
    In limited circumstances you may consider the use of direct comparison for calculating rough values eg: small suites in a block of otherwise identical offices where sales are common.

    Lease Incentives:
    • Rent free - costs you cash flow but may increase asset value (if face rent remains the same)
    • Fitout contributions - affects your initial cashflow but will increase asset value if it leads to increased rent
    • Rent reduction - costs you in asset value if you drop $10k on the nett rent, you've given away between $100-200k in asset value.
     
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  3. Ross Forrester

    Ross Forrester Well-Known Member Business Member

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    Can you easily predict residential property price growth? I cannot.

    For commercial property I look at the quantum and strength of the lease.
     
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  4. SStar

    SStar Active Member

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    Thank you for the education, Scott No Mates. For newbies like myself, commercial property is a completely new language which I hope will improve with practice.
     
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  5. Justin_mo

    Justin_mo Active Member

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  6. Justin_mo

    Justin_mo Active Member

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    Is the attraction to commercial property mainly getting yield of 8%, 9% etc, and finding high yield much easier than in residential property?

    Hypothetical: If you found a res property with 8% yield and then also a commercial property, same purchase price and 8% yield, which would you buy and why? Let's assume they are in the same suburb. :)
     
  7. Scott No Mates

    Scott No Mates Well-Known Member

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    The big difference is risk.

    There aren't many 8% nett yields in commercial nowadays.

    You'll need alot more $ deposit for the comms.
     
  8. radioactive

    radioactive Well-Known Member

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    Commercial Yields fluctuate on relative basis to the bank interest rates by a certain percentage.
     
  9. willister

    willister Well-Known Member

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    8%??? I've not seen anything near even 5 within the past few years!
     
  10. The Y-man

    The Y-man Moderator Staff Member

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    Too many other variable.
    Type of commercial, type/location of land, zoning (in the case of the resi), type of building(s), etc etc.

    In suburb where you would get 8% yield on resi, I would suggest it is some regional area, so would go for the commercial.... (specifically a shopping centre anchored by a supermarket major)

    The Y-man
     
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  11. Beano

    Beano Well-Known Member

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    There is an extremely wide range of yields and risk for both residential and commercial properties
    Even looking at purchases over the last 6 years the range has 2.5% to 18% for ones I (and my mates ) have purchased
     
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  12. MWI

    MWI Well-Known Member

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    In any investment you should look at overall return of investment not just yield, IMHO.
    Also many other aspects to consider when comparing RESI to COMM.
    How about you google both and learn, than be clear on strategy, and the numbers game, what do you wish to achieve?
    Everything is a number and should be precise!:)
     
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  13. lettert

    lettert Well-Known Member

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    @Beano what commercial property types do you target for good (9%+) yields? I like the yields on certain property types but growth (or potential lack thereof) has me worried, but with 10% yield I guess cg isn’t so important anymore
     
  14. Beano

    Beano Well-Known Member

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    The one my mate brought was purchased at 11% 18% on settlement he is looking at 21% net
    CG I would say over 24 months maybe 100%
    I posted the property details of this a few months ago.
    Historically my highest yields had the highest CG
    Historically my largest land % had the highest CG
    Historically my lowest rentals had the highest CG
    Historically my largest buildings had the highest CG

    I am past large yields properties ...there is a lot of work in those Properties ...that property I posted my mate sold his electrical business and now concentrates on these properties....2ha of buildings is pretty large

    I am just happy with low yields...and small profits ...the last property I brought only had a yield of 6.4% my other mate makes about $1m profit (based on 100% borrowing on a $18m site) multi tenanted...I invested about the same but only make $.4m ...from 1 listed tenant but no vacancies and no work for probably ever ..

    I do post these deals but note they are after they have been settled

    These are mainly commercial the last residential deal I did was 7 yrs ago ...but they are getting a net yield after expenses of 8.8%
     
    Last edited: 28th Dec, 2019
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  15. lettert

    lettert Well-Known Member

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    Thanks for sharing, whereabouts are these comm properties? Mostly nz?

    Edit to add: 100% borrowing wow! Where can I learn more about this?
    A quick chat to a business lender friend only indicated 65% lending (at approx 6.5% from a big 4 bank), maybe another 10% from a low-doc lender, this on a very secure long-term tenanted property
     
    Last edited: 28th Dec, 2019
  16. Beano

    Beano Well-Known Member

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    Yeah ...but borrowing is off other properties ..using other equity
     
  17. Beano

    Beano Well-Known Member

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    The actual deposit has ranged from 30% to 50%
    Repayments Nil to 6% of the loan per annum eg $16m loan repayments $95k per month . This is principal only ...plus interest.
    The highest was P and I over ten years
    In most cases bring the loan to 40% based on WALT (weighted average lease term)
    So say $10m purchase, WALT 5 years, original borrowing $7m then debt must equal $4m in 5 years while maintaining 1.75 net rental to interest ratio.
    So repay $3m in 5 years
     
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  18. Omnidragon

    Omnidragon Well-Known Member

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    I go for cap growth. In my experience my commercial has far outperformed by residential on an annual return basis, but that may be because I’m a bad house picker