Hi all. I am looking to buy into an unlisted REIT on a commercial property in a regional CBD location. I am new to REIT's, and commercial property, but I have been investing and developing for a few years. I purchased $50k into my first unlisted REIT which is yielding 8%, no fees, which pays out quarterly. I have done my own calculations using my limited experience, however I would like someone to help me out with a sanity check. Any comments are welcome The property is located on a main street in the CBD in a good location. 5 tenants. Recently commenced in 2018/2019 - 3 tenants on 5+5 year leases - 1 tenant on 5+2 year leases - 1 tenant on 5 year lease I consider the tenants to be fairly strong. Mainly financial services, lawyers, service type companies All leases are on fixed 3% annual increases Income = $1,000,000 (Inc. $286k recoverables) Less Outgoings = $300,000 Net income = $700,000 Purchase Price = $11,650,000 Loan = $6,600,000 (~55% LVR) Interest rate = 3.45% Interest = $230,000pa 700k (Net Income) - 230k (Interest) = 490k 490 / 5.05 = 9.3% ROE The site has development potential for apartments which would mean demolishing the building. We will hold the site for a few years. I expect to get some growth in the land value in the meantime. The trust will probably be rolled up, and then I can reinvest in the development. EXECUTION I have pulled $140k equity out of 2 of my properties and intend to put this into the trust. Getting them to 80% LVR (even with poor valuations - I expect to get some more capital growth as the market goes up). Interest is at 3.7% so I would end up with a net yield of 5.6%. I currently hold 4 residential properties (2 with granny flats) with good cashflow. I have a positive net position of 50k in shares as a backup with a decent buffer in savings. I lack the serviceability to buy any more property. I am a bit sick of residential (I have spent years of building, renovating and maintaining them myself) and I want to diversify a bit into stable assets. Any thoughts? Good deal / Bad deal? Are my calcs good? Thankyou
Is the REIT open ended or closed? (i.e. what is the liquidity?) Gearing looks a tad high for a, $11.65m building. I usually prefer having listed companies (or better still Gov) as tenants as it is harder for them to go bust and disappear mid-lease. The Y-man
What other fees (disclosed or not disclosed) will impact on the return? How old is the property ie is it worth redeveloping? What are the forecast capital works over the next 10 years? (Tenants not being liable for capital works) The leases run out at a mzximum of 10 years, without forking out $$ to the sitting tenant to buy out their lease, you may be waiting a while for the site to be sold as a development site. Is there really demand for apartments in that regional town or is it wishful thinking? Houses, villas & town houses are cheap as chips.
I thought 50 to 55% was fairly standard for commercial? The Trust manager told me they intend to increase the LVR to 65% at some stage. One tenant is a listed company. I agree with you here.
1. Re Fees. I will ask. For the other reit the manager is not charging any fees. I will find out for sure when they give me my first statement. 2. It is an old building. Very solid construction (it has survived a few disasters). Good quality internal fitout. I can stage the development to get units on one portion and keep the commercial building in the medium term. 3. Re capital works. I will find out. 4. Agree. Happy to sit on the land and collect rent. I can stage the development as mentioned. 5. I cant tell you the location (sorry) but i believe there is a good market.
I am unclear on the exit arrangement (i would need to clarify). I can pull out at any point and another party would take up my share. The issue is whether they would pay me the market value or if it would be up for negotiation.
I am worried if there are 2 or more vacancies at any one time (i.e. no lease renewal). Depending on what the outgoings actually are for, and the rent that each tenancy pays, the bank may recall the loan. Need to plan for the worst case. The Y-man
Is this a unlisted property trust run by a professional manager? If so there is no such thing as “charging no fees”. What sort of property fund manager charges no fees? Are they running there property management business out of the goodness of there hearts? also no such thing as I can pull out at anytime. Unless they give you that in writing that they have a guaranteed liquidity scheme and even then they could say sure we will buy your shares back but at a significant discount to what you paid. Generally going into unlisted property trusts you should not expect to get your capital back till the end of the investment term, usually being 5-7 years. Being that I hold investments in 15 plus different property trusts across 5 different managers I would look carefully on who this manager is and there history. I would stick to larger players who have a proven record over many many years. Another thing. Are they providing you with a PDS? Or just an IM? This will tell you if they are registered to take money from retail investors or are restricted to wholesale investors. from the basic info you provided the returns on face value appear to be attractive. But there’s lots of info missing to be able to really asses this product. For unlisted 50% gearing is normal. 65% is the high end. There is a level of concentration risk with an asset having only a few tenants come end of lease time. But 5 year wale is decent in the office market. You have to have faith in the manager that come renewal time they are on the ball with getting tenants to re sign or new tenants in with minimal vacancy time.
