Looking to purchase first commercial property

Hello all,

I have been "lurking" on this forum for quite a while and must say there is a lot of useful information to take in. Thank you!

I am looking to purchase my first commercial property. I have a residential investment unit in Sydney at the moment which is negatively geared so i thought i might look at commercial due to the higher potential yield.

Because it is my first venture into commercial i was trying to stay under the $200k mark and find something with a lease already in place.

I came across 1 Queens Rd Melbourne. St Kilda Towers.

I am from Sydney, so i don't know too much about the Melbourne property scene but would definitely go down and get a better idea of it if i was to purchase.

The building has numerous offices for sale under the $200k mark and a rental yield of 7-10%.

There also seems to be a bit of action in the building as far as SOLD/LEASED properties are concerned. There is also plenty for sale and for lease at the same time.

Most of the offices that are for sale have leases in place and tenant pays all outgoings.

I have made some enquires and found the body corporate fees are around $1300pq and water around $190pq

Is there any advice or any questions that should be asked that a first time commercial investor may not be aware of?

Any help for me to make a more informed decision would be greatly appreciated.

Thank you!

Sam

 

Is the one you're looking at leased or empty? If empty, do you know how to get it leased? How will you compete for tenants against others in the building or similar?

Are you buying it outright or need finance? Leased properties are generally easier to finance than vacant ones. Some financiers will not do cbd locations, or at less favorable terms. Worth having a chat to a broker like @Corey Batt who's very experienced in this commercial space.

 

Have you considered using someone on the ground who knows the ins and outs and whos who in the zoo?

AKA Buyers Agent.

 

@Beano

 

If i was to purchase one of the offices, i would make sure it had a lease in place and had at least 12 months.

Here is an example: 1231/1 Queens Road, Melbourne, Vic 3004 - Offices for Sale #502076522 - realcommercial.com.au

I've had a quick chat with my broker and finance shouldn't be a problem as its only a small amount. Having a proper meeting with him on Monday so we'll see how that goes.

Thank you for the recommendation. I will contact him.

For the moment i would like to do my own research but if i don't feel confident i definitely will.

Thanks

 

They look like aerviced offices - are you tied into a management agreement or separately leased?

 

I agree. It looks like there could be some competition if your office became vacant. It's certainly worth considering how many other offices you will be competing with.

 

Commercial property is great but you really need to understand the ins and outs before jumping in – it’s a very different beast to residential lending (but not in a bad way).

People refer to commercial properties but we really need to be specific as to what type of property as there are various things to factor in such as finance.

The type of security is one of the elements that dictates the value of the property and the yield. Retail is generally easier to finance but has lower yields compared to office and industrial properties. As a rough guide I would be looking at 8% for retail, 9% for office and 10% plus for Industrial but this is dependent on a number of other factors which I will mention soon.

Some of the other standard types of properties include shopping centres, showrooms and warehouses/factories.

Then you have “specialised” securities such as Petrol Station, Bottle Shops, panel beaters, reception centres, etc – these are harder to finance and have special requirements. For example if you are purchasing a converted bottle shop you will need environmental reports, to confirm no contamination of the site, etc.

Then you have “very difficult” to finance securities such as brothels, hotels, etc whereby you are looking at considerably lower LVR’s and limited number of lenders that can fund the purchase.

A very general/blanket rule is the harder it is to finance the higher the yield should be.

Then you need to factor the location of the security – so some lenders may be ok with standard securities but may baulk at the location particularly regionals.

Also don’t but an industrial unit where there is hundreds of vacant land next door ready to be built. There is a reason the guy is selling his property yielding 15%.

The tenant, lease duration and the yield play a huge role in determining the value of the property. Most banks will not finance purchases that are on expired leases unless you can service the debt without the use of the rental income. Finding new tenants also take longer but the flip side is that most tenants will pay for all the outgoings unlike resi property. Be very careful of purchasing an investment commercial property with a expired lease or a lease that is due to be expired soon.

The other thing you may need to factor depending on the security type is the tenant. Let’s take a petrol station as an example, its far easier to finance a multi national tenant like Caltex vs an independent. Also look at the business – I would be worried if a video store operator wanted to rent the premises.

 

A lot of the building is leased to Asia Pacific Serviced offices but you are not tied into there management. One of the properties I enquired about actually had a 2 X 1 X 1 lease to Asia Pacific so I guess they lease extra space as they require.

 

@Shahin_Afarin

What about free hold retail in CBD or within 10km from CBD? It's almost impossible to find one with yield of 8%. Many of them are sold with yield between 3-5%. Although I can understand if they have development potential. Are they the standard yield? Or simply overpriced?

 

Around the same size, there seems to be about 10-15 vacant offices in the building. As far as finding a tenant, all the rents seem to be around the same psm. Some are higher, some are lower and I think that factor is determined by the location in the building. Some offices have bag views, others face another building and there are also internal offices with no windows. I think I need to watch the building for a little while and see how the vacancies fill up.

 

Thank you very much for that detailed info! It certainly does help. I will see what my broker says about it. Thanks again!

 

You are sacrificing yield for potentially a higher quality asset (in terms of tenancy, ease of lease, etc) however even taking that into consideration and the fact that money is so cheap why anyone would consider a yield of 3%-5% on a commercial property unless as you said may have development upside.

 

I have had a fair bit to do with a number of deals in that building. I would be careful buying there, it's a good building, good for tenants but there has been a two tier market in there for a number of years and capital growth has been limited.

 

Really? Thanks for letting me know that. Being from interstate it's harder to get a full grasp on the property. I've done some numbers and worked out the average price per sq m as well as return from the sales history and it seems the average ROI is around 7.85% (for a tenanted investment) and the price per sqm is around $4400. Could you shed some more light on the two tier market down there?

Thanks once again for the heads up!

 

I don't have my files with me so this is from memory.

Asia Pacific building with controlled release of units and a lot of units marketed interstate in 2001/02 when it was built. This set a high "market" rate per square metre rate and most of the initial purchasers would have lost money.

Asia Pacific appear to repurchase units and let them to related parties to make them look good for sale. These leases often have multiple option terms which are never exercised so they can be a bit of a trap. Units sold by Asia Pacific, again probably interstate, seem to get a much higher rate than those that go to out of building agents hence the two tier market comment.

Within the building there are also different markets with good tenant demand for upper level units with good natural light and views over Albert Park. The lower level units, esp internally, get much lower rates.

Also be careful of Outgoings as they are high (as is often the case in office units) and I thought most of them are on Gross leases.

Now, I'm not saying "don't buy there" but I am saying there are a number of things that need to be ticked off. A longish lease (not 1+1+1 year) to a non Asia Pacific tenant who pays outgoings (a net lease) and located with good natural light (better tenant demand if your tenant leaves).

One good thing within the market in Melbourne at the moment is that everywhere is a resi development site so there is less likely for a similar building to be built which would flood the market with a large supply or newer nicer units.

 

That's very interesting information. Thank you for that. I did notice that the offices for sale that leased to asia pacific offered a more attractive ROI but generally a higher cost per sq metre which rang some alarm bells. It matches exactly what you are saying.

I was planning a trip down there soon anyway so I may check them out and try and see exactly what's going on.

Your information has been very helpful! Thanks once again!

 

There's a bucket load of recent sales in the building. I'd start by comparing the $/m2 rate that has been achieved. There may be car spaces included in the sales also so you may need to make adjust for them also.
Be prepared for a lot of short term leases. Generally tenants leasing smaller suite only sign up for 1-2 years and then they either outgrow the space to go broke.

 

Hi @samlove ,

How did you go with your commercial property purchase ?