Ground floor retail shops in new residential estates

Hi all

What are people's thoughts of ground floor retail in new residential estates in a growing suburb?

Buy or stay away? Will be great to hear some experiences here.

 

You lost me at "new residential estates".

 

Eg stockland or frasers residential land and house estates?

 

To be fair, I don't actually have direct experience - mostly just taking an educated guess.

The main question is - why would such a property perform or be special in any way compared to the next commercial property?

 

Is it off the plan or are there already ppl moved into the estates? i.e. can you tell if there are traffic walking in front of this retail property?

It is very hard to predict how pedestrians behave and if is off the plan then I would think its a big gamble.

 

there are already people moved into the estates. i think the next nearest shopping junction is 10 mins drive away (this is bigger, think westfield but smaller).

Current tenant mix includes a bottle shop, dentist, estate agent and medical centre.

Traffic is bit hard to estimate - was there in the afternoon and foot traffic was ok? Neither busy nor dead. There is also a community centre, childcare centre and school nearby if i am not mistaken.

 

Well then it will depend on the price. If there is no potential of increase in pedestrians traffic, then there will be no potential capital gain nor rental increase.

I also can't tell how liquid it will be if you are going to sell it in the future. It will all depend on how much demand there is.

Look for the rental income around the area and make sure this property isn't jacking up the rent so that it can sell for higher price and get you to buy in. I wouldn't go for it even it is a 7x7 lease if the rental income doesn't make much sense to me. 7 years still a short time for a commercial property.

For understanding if the 'price is right' you can always compare the price/rental for the shop you are looking at with shops that are in areas like wentworth point, wollicreek, mascot, waterloo, Rhodes and etc etc, those suburbs I suggested has a high level concentration of apartments(lots of people walks around) and there aren't any westfield like place around(except rhodes). Even those areas, there can be a huge different in rent/price between 1 shop at the beginning of the street to the shop just next block of the street.

 

There is not many comparable sales, at least not from what I can find. The asking price of the vendor will sit at a 6.5% net yield. I'm not sure whether this is a good yield for the factors I just outlined. I do agree though that there may not be any rent and CG increases due to the fact that this shopping centre is specifically servicing an estate from what I'm seeing.

My long term plan is just to rent out to the same tenant till forever hopefully. Even if rent doesn't increase or CG don't increase, in theory it's still a 6.5% net return every year which sounds not too bad?

 

Not to be -ve but the 6.5% is not exactly what you are getting, let's say your tenant pay all expenses i.e. strata, electricity, water, council etc etc etc(except Land Tax, well I have seen one that pay half of the land tax, crazy right?) and the return is 6.5% net(but exclude your income tax), you still have to take into account that one day this tenant leave, and the vacancy period after it. Commercial property normally has a longer vacancy period than residential. So you have to factor that into your yearly return. You also have to take into account that during the vacancy period you will have to repay your commercial loan from your capital reserve/cash flow, and commercial property normally have a higher repayment compare to residential due to it will be P+I, higher interest rate and shorter loan terms(normally 15 years loan terms).

Of course you can pay this out with cash (if you have it) but if you think about the amount of cash you will put in, and the opportunity cost of not borrowing and then invest in some other better growth asset class can be a big mistake over the long run.

Having said that, soon we will be entering into the -ve interest rate era, having an asset that pays 6.5%net (assume) every year can be attractive. But that's only if the tenant doesn't leave, or a new tenant will rent it from you in a short period of time if it goes vacant, or if you can sell it in a short period of time if you want to with the same or better price than you purchased. Holding it without anyone renting it can be very demoralising, and I have mentioned a lot of ifs just now.

For me, I would rather save my bullet, and wait until a property that provide CG/Rental/or Both increase in the future. This happen normally once a year if you look for it(i.e. the vendor really needs $$) or the economic is really really bad(e.g. during/1-3 years after the GFC). I can't predict whats going to happen with this cv19 recession, but from the avg ppl's income vs avg property price to be 10 times+, I think we are kinda of in a property bubble, but that will also depends on how much credit is available out there (i.e. how much the banks are willing to lend).

 

Based on the limited information - yes, no or maybe. Floor Area? Ceiling height? Base building services (eg exhaust, makeup air, grease trap/capacity, power, gas, ventilation, garbage room, remote storeroom).

Any lease is only as strong as the tenant and the term certain ie 3-5 years. Disregard any options.

It is more difficult to find transactions as they are generally held for much longer than residential and there are fewer of them.

You need to research rents in other areas as there is limited data in the local area and that means spending $$ on relevant registered leases.

This is a retail lease - tenants do not pay any capital component of strata (ie sinking fund contributions) nor do they pay land tax which see both specifically mentioned in the retail leases act.

 

Its about 300sqm. No grease trap for sure. Potentially can be a pharmacy if the current tenant moves as there is no pharmacy in the area to support the medical center

Other areas seems to be paying more per sqm, but again these areas have a higher foot traffic from what i see (like on a main road or big shopping centre area etc). What do you mean speind $$ on relevant registered leases - is there a database where i can purchase registered leases on specific buildings/units?

this is a very interesting one. are you saying that if the OC committee raises special levy, the tenant don't need to pay this even when the current lease specifically says they pay 100% of the outgoings because of the Retail Act?

 

i do agree and am aware of the matters raised in your post. just that i am not really into the negative gearing game. even my residential are all positively geared before depreciation so commercial do seem very interesting but am still learning.

 

One of my commercial tenants pays 100% of the land tax bill in their lease... is it really uncommon?

 

300m² is great, you can probably break this down to 3-4 smaller tenancies depending upon the width/depth of the space - many specialty stores are around 120m² or less.

You can go to sites like infotrack and pay for registered leases - not much good if you don't understand the lease.

Yes, the tenant may be entitled to a refund on money spent on maintenance which hasn't been spent during the lease term.

Retail contributions are limited to single holding basis ie the tenant gets the benefit of the threshold even if the lessor doesn't.

View - NSW legislation

 

I love +ve gearing property too, especially commercial, just that you still have to be very picky. The truly good commercial property is like treasure/1st div lotto, set you up for life.

 

lol the land tax increases if you keep buy land right? so its a variable for them? that 100% land tax bill can be in the hundred k mark if you own lands that's like in total worth hundred Mils? but I guess if you are that rich you can have different entities owning different land asset.

 

Commercial propetty is where all the big boys are. It is where you can make seriously big money but you can also go broke if you don’t know what you’re doing.

As others have said the fact that it is a strata and it is in a new residential estate is a negative. The best thing about strata is you avoid land tax.

Bear in mind that most landlords offer incentives to get retailers in. The retailer is happy to pay the higher base rent as they are just amortising their fit out costs over the length of the lease. The landlord has an upfront contribution cost but then recoup that by capitalising the property to a much higher price (works wonderfully well in a low interest rate environment)

I would never touch these stratas unless the yield is very high to start or there is genuine potential for rental increases - due to scarcity/ visibility/population increase - because you will be offering 20 to 30% incentive each time to attract a new tenant. That 6 1/2% can very quickly become 4% without the inherent capital growth of resi.

you need to keep aside cash reserves because banks can slash the valuation if they go vacant ask ask you to tip in cash just like a margin loan. Once you factor the higher equity requirements - I think the return is similar to residential and you take on much higher risk.

Where commercial is super attractive is when you have the asset base to buy well located freehold property with high land value. Then you get the positive cash flow and the inherent capital growth / redevelopment just like Resi ie. best of both worlds.

 

That's a desperation incentive - I can't recall a deal in recent history above 10%

 

You must be very lucky.
I just did 75k+gst nett, 7yrs, $100k fitout contribution to a kebab shop (not the greatest tenant)
Another one was 7yrs @ $200k to IGA, with a $450k value of rent abatement/fitout.

don’t forget the 15-20% agent leasing commission, lawyer fees, rent free period that go on top. 3 month cash bond is the only security

Effectively, landlords chalk up all the upfront risk equity and tenants can hand back the fitout if the business fails and you then reposition it to something else.

You need to offer a lot more than 6.5% of an already inflated rent to get me tempted to buy these things...

 

@Bris developer - gees, agents in Qld have it made (just don't tell NSW agents) - 11% comms down here.

Hefty incentives as well.

What are the reviews (4% or even CPI+1.5%)?