Commercial Property Yield

Hi all,

I'm an investor with over 5 mil worth of residential properties thanks to the property rises. But now i'm asset rich and cash flow poor. Well cash flow ok because I'm still working 9-5. This has led me to looking at cash flow investments i.e. commercial.

I recently attended a commercial auction where they auction off whole bunch of commercial properties. It seemed like the gross yields were around 5-6%. With some regional properties getting high 6s but not 7%. Now i was seeing quite a few people spending $1-2 million for properties around 5%. So lets say they get a loan of $1-2 mill with a good interest rate of around 5%, it doesnt seem worth it or am i not understanding something.

Is there a depreciation factor involved?
Perhaps they are paying down 30% cash deposit?

Would be great if someone who has done this could shed some light for me.

Regards,
CommercialGuy

 

For a commercial property, a min deposit would be 30% as you have alluded to. Even if it is cash you still need to factor in a lost opportunity cost and in many cases its borrowed funds from equity available elsewhere.

Yields for commercial should be 8%+ to make it worthwhile.

 

Hi Colin,
yes i agree, the 30% most likely would be equity which would be borrowed money anyways. This means 100% loan. So that's the thing I don't understand, all these folks were bidding against each other in the millions for around 5-6% gross yield.....

Is there some sort of benefit they are getting by doing this?

 

Would be closer to 105% when you account for costs.

Maybe they are banking on capital gains as well?

 

Or is it leased to a great long-term and strong tenant with more than CPI increases in rent each year?
It might start at 5% but in a few years could be considerably more.
Also, were they fully leased properties or were there opportunities to increase the yield by filling vacancies?

 

Also, commercial leases are often longer, 3+ to 20 years
Depending on the lease terms, tenant pays outgoings, water, rates, even in some agreements the land tax
Then they are also likely to be liable for maintenance, AC, hot water, internal fit outs, shop fronts....
So each is individual, you can't compare purchase price to rental return the same as domestic.

Finally, it isn't DOMESTIC with the tenant doing a runner or complaining about "everything" and being a PITA

 

A good retailer knows how to complain about anything & everything.

 

True, it can and does happen.
Even with director guarantees.
Hopefully no where near as often.
Some places just aren't as desirable as when they were built (pizza hut buildings), or due to RMS/RTA road changes there isn't the same passing traffic or no longer street parking out front.
DD is the key.
@Beano is full of good advice on commercial property

 

You also have professionals and small business owners purchasing their business properties (ie the premises that they run their business from) in their SMSFs - there are considerable tax (and related super) advantages in doing so. In these instances, yield becomes much less of an issue (more important are if the cash flows of the business can make the super contributions necessary for the loan, etc). You would be prepared to pay much more in this instance than an investor normally would.

 

Since commercial tenant pays outgoings such as council rates, insurance, landtax, etc, lower gross yield is needed than residential property to have same net yield

 

Lots of reasons that people have alluded to here but I will add more:

• Have a look at the security deposit clauses in the leases. There is potential to evict a tenant, re-lease and not suffer any monetary loss (the security deposit soaks it all up). This is uncommon in my experience though. But in general the larger security deposits add peace of mind for investors and they are often indexed to increase every year in line with rent unlike residential.
• In VIC a 'retail' versus 'non retail' tenant can have a huge impact on yield, the latter can pay some or all of your land tax as part of their outgoings, the former can't.
• The chattels can sometimes be of a very significant value=e.g. the full fitout of an office
• Be careful of owners corp admin fund fees as they too can drag down yields

But yes, in general the gross yield is much closer to the net yield than would be the case in residential.

 

Hi CommercialGuy,
I agree, those yields are too low and not worth taking on with a high LVR. I only consider net yields of 7% or greater with a minimum three years left on the lease.
These yields can be easily found in places like Brisbane, Newcastle, Gold Coast, Tas, Adeladie, Perth and any regional city.
Yields in Melboune and Sydney have been compressive over the last five years.
Ps- I just moved all my commerical loans to ING with 75% LVR and a 4.69% interest rate. I have some clients who have recently bought commercial properties with 20% deposits via the ANZ bank.

Scott O’Neill

 

Not always

We hold 2 commercial places (warehouses) both negotiated most of the rates in the lease.

Only general waist is on us. Rest is included in the lease.

It depends very much on the negotiations and supply and demand at the time.
Don't forget certain free rent periods , fit out contributions......

unlike residential nothing is assumed to be inc or ex.

 

A little snapshot from recent sales to give an idea of how firm commercial yields are at present (Generally 4.5-6% with a blue chip retailer - sourced from a promo to drag in vendors):

 

I had to check the date on these posts....All this talk of 6% - 8% yields, I thought we were back in 2014.
If you can find a commercial property for anything close to 6-8% net yield there's a reason for it, and I bet it's not a good reason, best to steer clear.

 

I have always needed a 40% deposit, beginning with a 5% rate, it is a good, but standard fair rate, with other condition built in it is very attractive, all out goings sometimes maintence and council rates included , payment should be 6 or 12 months in advance, indexed rent increases the compounding income part is probably what your missing.

 

Hi experts,

I am looking at a Townsville industrial facility leased to ASX listed tenant expecting around 8% yield with lease plus option going to 2026 and 3% fixed increment.

Don't know much about Townsville as a geography and how attractive it is for industrial tenancy.
Any feedback or experience specifically with it?

Does the yield, the tenancy and the geography qualify a lease doc loan without looking into the
specifics of the property itself as I am still waiting for the info?

Thanks,
FXD