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How do you justify a low yield? (and is this acceptable)

Discussion in 'Commercial Property' started by Adele, 27th Dec, 2015.

  1. Adele

    Adele Well-Known Member

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    Hi Everyone,

    I've been reading this forum for a while, being amazed at the sort of yields everyone is getting for their CIP (7-12%). My yields are somewhere on the modest scale, and I'm wondering whether I have let my emotions undermine me. Does anyone have anything on their portfolio with a small-ish yield? And what were your considerations? (Mine were the development potential)

    This one sold for $3.3mil yielding 2.7% (not mine)..... Would you buy something like this, and how would you justify it?
    19-21 Toorak Road, South Yarra, Vic 3141 - SOLD Retail Property #501645861 - realcommercial.com.au

    This one only yields around 3.5%
    78 Toorak Road, South Yarra, Vic 3141 - SOLD Retail Property #501766842 - realcommercial.com.au

    Happy holidays :)
     
  2. Bayview

    Bayview Well-Known Member

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    You can easily justify a low yield by having an obscenely high level of disposable income to service the neg cashflow.

    Otherwise; you can't.
     
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  3. Speede

    Speede Well-Known Member

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    Remember when a commercial property has a really low yield.....you are not buying for yield.

    location is king / increase value / release equity.
     
  4. Scott No Mates

    Scott No Mates Well-Known Member

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    The second site has a great location but only a single tenancy. The biggest scope for increasing yield is to bulldoze and add an additional floor (or two) however this is dictated by the LEP.

    Both sites are small with limits on potential (except for the neighbours).

    The big drawback with the first site is the power poles out the front limiting what could be done.
     
  5. DanW

    DanW Well-Known Member

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    I don't know how they justify that..

    Can find much higher yield in Sydney.

    The only reason I can think of is if that is if the price per sqm is right for the area. If it's under rented per sqm maybe they can increase the rent big time on market review.

    Hard to get a loan on that lease though, except for what Bayview said
     
  6. D.T.

    D.T. Adelaide Property Manager Business Member

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    Sometimes it's not for the yield. Sometimes its for an owner occupied premise or for a developer who sees value.
     
  7. Adele

    Adele Well-Known Member

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    Lol, I don't have an obscenely large income, just an obscenely small spending :D. I guess strike 1 for me
    Mine came with drawings/proposal for 8 Apt + 1 retail. I didn't even notice the 1st site had a power line in front of it, good eye!

    Just wondering why it would be hard to get a loan on the lease?

    I think most on this street are not owner-occupied. I know of 7 more on this strip yielding between 2.7-5%.
    Just wondering what sort retail properties which are non-regional that yields 7-12%.
     
  8. DanW

    DanW Well-Known Member

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    @Adele the reason I think that it's hard to get a loan is because it's not a large enough yield. Unless you have a large income to go full Doc, you would be getting lease doc and then have to have good interest cover to get approved. The brokers can elaborate more, but this is my own situation I do not qualify for a loan unless the lease fully covers everything in a big way.

    I'm also trying to find 7%+ metro deals simply because I have no other choice. They are out there, but it's not always clear on the ad.
     
    Adele likes this.
  9. Adele

    Adele Well-Known Member

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    Yes, The ads for commercial properties are sometimes, borderline cryptic.:D

    The ones that I've found with good yields so far are way out of my budget.:rolleyes:. The one I ended up purchasing has a lower yield but in a good location. Even then, it was tough psychologically. I purchased it with vacant possession. The wait for tenant was rough for me, as this was my biggest purchase to date.
     
  10. DanW

    DanW Well-Known Member

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    It's a challenging ride for me too, finding lots of great deals outside my price range.

    I haven't got the balls to buy a vacant property yet though.

    How long did it take to find your tenant?

    If only I had a spare $1m cash, would look at buying this baby for $2.9m would be a sweet 10%
    1/175 Five Islands Road, Unanderra NSW 2526 - For Sale
     
  11. Adele

    Adele Well-Known Member

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    Took me a few months to get a tenant. Property settled in May and tenants just started trading recently. (this included time for tenants to apply for permits + rent free period for renovations). Was tough to insure when vacant too. Luckily I managed to get insurance as soon as they signed a contract. Had some water leakage in that massive storm in Nov midway through renovations.

    I actually had a few offers on the table but I ended up going with the tenant I thought would have the most prospect/longevity there. I figured that they would add the most value to the property in the long run.
     
  12. Adele

    Adele Well-Known Member

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    I'm terrible at negotiating. Do you think it would sell for $2.9? I've seen a few which went above and beyond asking price in Melbourne.

    Went, bid & lost on this one. Agent quoted 1.5-1.7mil for each. Sold for 3mil each.
    175 & 177 Coleman Parade, Glen Waverley, Vic 3150 - SOLD Retail Property #501444691 - realcommercial.com.au

    Didn't even go to another auction in Box Hill because I was just so demoralized. (Box Hill was quoted slightly higher)

     
  13. DanW

    DanW Well-Known Member

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    Wow that's such a huge difference!

    I have no idea how much this one will go for though, was driving through on the way back to Sydney so gave the area a quick search.

    I only really know the rates in my home area where I am looking based on comparables.

    Can be alot more work to close one than resi that's for sure.
     
  14. Scott No Mates

    Scott No Mates Well-Known Member

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    Only because commercial agents are working in a more educated market, where you have sophisticated buyers and sellers, yield isn't the only criteria, aesthetics don't play a part in the game and emotions don't come into it.
     
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  15. Dazedmw

    Dazedmw Well-Known Member

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    As others have said the sale prices are not yield plays, they are reflective of a rate over the land area which doesn't really change depending on the improvements on the site (and therefore the income generated). Especially in the case of the first property.
     
  16. Ace in the Hole

    Ace in the Hole Well-Known Member Premium Member

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    Only 4 years left on the lease, how confident would you be that they'll renew or that you could find a replacement tenant at similar rates?

    I need something like this to boost my retirement cash flow, but whole different game to resi I feel.
     
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  17. Adele

    Adele Well-Known Member

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    I'm not familiar with the area at all. But I would expect that it's harder to get a tenant at a higher bracket of rental price. Most likely will be harder to rent out to new tenant at the price you want, and therefore a longer vacancy if lease is not renewed.
     
  18. DanW

    DanW Well-Known Member

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    Multiple tenants and longer lease would be nice.

    But I'd wonder what the going rates are for the area too, if the tenant goes and a new one comes, what would be the new rent then.
     
  19. Westminster

    Westminster Tigress at Tiger Developments Business Member

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    Then I suppose you ask did you pay the price you did for those plans/permits/development potential or was it purely for a commercial tenancy.

    Many people that buy development sites put up with poor yields until they can develop the property. The yield they get is merely to offset the holding costs and they often find that the yield is nothing spectacular. This is true to for resi and commercial. I have one site which is a mixed resi/comm and cannot be rented currently so has a yield of minus blood sweat and tears. It will become 100sqm office and 4 apartments.
     
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  20. Adele

    Adele Well-Known Member

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    Wow!