First industrial investment property

Hi all

My strategy is to purchase a cashflow positive industrial warehouse investment property located in SYDNEY.
Budget is ~$1million or less - high clearance warehouse style with office space (~150m2 or less)
With this in mind, does anyone have any advice on the following:

1. Location - besides the traditional location considerations (access to roads and highways etc) is it better to look at the heavy industrial areas out west/south west or closer to inner city (Auburn, Lidcombe etc)
2. What is the best way to value the property? Generally it seems like most new warehouse developments are going for $6k - $9k / m2. What are the general rule of thumb valuation methods these days?
3. As a cashflow positive investment, what kind of net-yield % range should i be targetting?

If you have any other advice, or things i need to consider/look out for, i would appreciate any pointers as i look further into this space.

Also any recommendations for commercial specialist buyers agents would be appreciated too

 

Is this your first commercial property?

$1M is not going to get you much in Sydney these days, it's in a price range that is very easy for a lot of people drawing on home equity or super through SMSF. Industrial is also very hot right now so will compress the net return based on it being the flavour of the month and Sydney being Sydney will offer a low net return. In summary I'd be surprised if you get >4% net.

Sydney will offer more growth than cashflow

 

Land rich industrial is the way to go but barriers to entry are high

 

At that price point you’re competing with owner occupiers who are trying to lock in stability by purchasing a unit rather than renting.

so what you’d find is that yields will be horrible for that type of stock in Sydney, due to the hot market

on top of that don’t be surprised if the outgoings are 5k or more per annum.. usually something in the range you’re looking at is leased as a gross lease, and small warehouses are likely to have higher tenant turnover as well!

with all of that said, due to the tight stock right now, you can have the confidence that whatever you purchase will have ongoing tenants with minimal vacancies. Rentals are also likely to continue to trend up. This is a pretty big deal in industrial. Only Sydney seems to have that tenancy guarantee due to the supply/demand dynamic majorly in favour of the landlords.

 

Insurance has increased dramatically at the latest round of renewals - closer to $2500, rates were over $4k (much higher than residential), land tax was well over $10k (ucv for general industrial increased 50% on previous year, vs light industrial only 10%), water $1k + usage, AFSS wasn't quite $1k.

Those figures were typical across several freestanding buildings/single occupancy, not strata, so the costs may be lower.

Not all of the costs are borne by the owner, even on a gross lease.

 

I agree. I looked at a industrial warehouse recently where the tenant was on a gross lease . I refused to buy because I felt insurance was a huge risk to the long term net income stream.

I always prefer to recover 100% of insurance, management and land tax - escalations in your cost base can very much degrade the long term income and capital return.

large corporate tenants have particularly good lawyers and leasing negotiators whose job is to lock in a cheap per sqm rental ++ options (long term tenure) ++ generous upfront incentives ++ shift all the long term statutory/maintainence/insurance/management risk onto the landlord.

 

Owners use agents who are good at locking in a deal but poor negotiators.

 

Hi guys

Thanks for all the advice and comments.

What are the financial metrics involved/to be considered with purchasing an industrial site as investment?

Purchasing aspect:
- Purchase Price
- GST
- Stamp Duty
- Other fees

Outgoings:
- Land & Water
- Other Utilities (Electrical, Internet)
- Insurance
- Management Fee
- Strata (Security, Common area maintenance etc)

 

• Nett Rent
• Cap rate
• Vacancy rate

 

Just to clarify:

Net Rent = After tenant has paid for all the outgoings on your behalf, the rent that goes into your pocket?
Cap Rate = What is considered an acceptable cap rate?
Vacancy Rate = What is the standard for the vacancy rate? Is it based on similar property style in the same suburb? Or would it be for the specific block

 

Or out of your pocket if it's a gross lease.

Nett Rent/market value

Purely dependent upon the state of the economy.

Generally considered on a macro level ie western suburbs or CBD. Micro level is at a suburb or estate or highrise building - ie a small sample.

 

Thanks Scott for the response
What ramifications does the vacancy rate play? Ie say on a micro level, there are 10 units vacant out of 100 = 10% vacancy rate. What do you do with this info? Does it directly affect calculation of feaso or is it just a general rule of thumb number ie if theres a high vacancy, you know that it might be difficult to secure tenant etc

 

In isolation, it gives you an insight as to what your competitors are.

More importantly, what's the absorption rate ie how quickly are vacancies being leased compared to new stock coming onto the market, is the vacancy rate increasing or decreasing?

What incentives are being offered?

 

We’re still building warehouses in Sydney for <$1,000/m2, fully fitted-out. Great development product if you can purchase the land (paddocks).

The Amazon warehouses (and some of the other automated warehouses) are incredible.

 

What do you mean by incentives being offered?

 

Fitout contributions, rent free etc

 

Although I am quoting myself above, @JTR has given a current market review below which shows what level of confidence exists for Parramatta commercial sector.

Other segments ie older office space will also get a lift from recent development.