Lease and yields question - First Commercial

Looking at purchasing my first commercial property.

Currently looking at a property which is around my price range. I was wondering if I could get advice on the following:

Firstly there is a lease in place, however, the company leasing the property is the current landlord. It is a retail space of 400sqm with shared parking in the rear. I want to do checks to ensure the lease being paid is at market, how do I go about this? I assume the best way would be to get an agent in to value it. However because I am not actually the owner, is this reasonable? I would most likely be getting an agent in to manage the property if I am successful.

Secondly what yields are people getting in the current environment? I have been looking at commercial property for about 5-6 months. From what I have read, articles mention to aim for yields of 8-10% (for retail/warehouse) yet all the ones I have seen have very low yields in the vicinity of 5-7%.

Any help in the matter would be greatly appreciated

 

The best way to do this is to call a few leasing/sales agents for commercial that deal with the area. They will be able to give you some idea of what properties have recently rented for. You can also have a look on RPdata/PriceFinder to check on similar properties with roughly the same floor area and type and work out the $/m2 to see if it is comparable.

There are some places where you can get 8%- 10% Net Yields, it just depends on what area/ type of tenant/strength of lease. This can also vary depending on the property type often industrial gives the highest returns as it carries the most risk. You can ask the agents and also have a chat to a local valuer that deals with commercial property, they will be able to tell you what yields to expect. Once you know what the market rent is supposed to be and what Cap Rate (Net Yield) to expect then you can start to get an idea of what the property is actually valued at.

Don't be afraid make an offer that is much lower than the asking price, as often vendors are unrealistic about their desired sale price. Just base your offer on the market rent and Cap Rate and explain this to the vendor/agent.

 

I don't know much about commercial but curious how long is the lease? And what is the consequence of them breaking the lease ? Can u hold the investment till u find the next Tennant....there must a SQM research vacancy rate site for commercial no?

 

The selling agent should be able to provide you with a copy of the current lease, rent, outgoings statement, body corporate levies etc.

Owner occupied leases/sales are notoriously in favour of the occupier - basic matters like favourable rent & reviews, minimal bond, options should have to be verified.


A scan of realcommercial.com.au should give you an indication of rent expectations (less incentives ) & talking to a few commercial agents an idea of the market and sentiment.

@DaveM is on the ground in Adelaide as a buyers agent may assist.

 

Gain all the information for the property from the agent - generally in commercial they will send you through an info pack which will contain all the pertinent info, copy of the lease etc. Compare this against leasing advertised rates per sqm, but also speak with leasing agents on the ground as there might be consistent discounting in the market *or* a reason why the property you're looking at may not fit the average leasing rates (communal facilities outside of leased space, inferior/superior area etc)

 

Be advised that alarm bells ring clearly when the vendor is also the lessor on a CP sale.

Problems:

1. The rent may be inflated to be artificially high - gives a great yield and then creates a higher "value" for the property.
2. When are the options for the tenant on the lease? 2 years from now? They may not re- lease and your property is vacant ( and cannot be rented for the same amount - as it was an inflated rent). Perhaps they are about to go broke?
3. Make sure the property is easily rented and general purpose (see below).
4. Make sure the intrinsic value of the property (without the existing use tenant!!) is there.

A good example of this was many years ago the banks sold all their old, essentially out of date country and suburban bank branches with initially fantastic yields and at high prices. What could be safer then rent from a bank? Investors snapped them up - competing to buy. Of course, all these properties had 15 - 25 year leases with 2 year options . Their option - not yours. You guessed it, at the two year option time they did not re-lease, and closed all the branches. Almost impossible to rent at all, even at markedly discount rents, especially in the smaller country towns. Old bank branches are not especially appealing for other use tenants. Hence all the empty (or marginally rented) ex- bank branches across Australia you see today. All were sold to investors (mostly mums and dads) by the bank, prior to closing them, at fantastic yields and high prices.