Random observation why it's much easier to buy resi property (and resi OTP) over commercial

Sure, do a bit of research on the tenants but dont expect them to provide anything to you. One thing to look out for is where the owner is also the tenant. Can sometimes be difficult to determine and you can bet the lease back terms are not at market rates and they'll probably leave at the end of their term and not take up any of the options.

You really need to compare apples to apples....a retail site in the middle of Perth is worlds apart from a shed in the middle of nowhere. Like comparing a 2 bedroom unit with water views in the middle of the city to a 3 bed house in Broome.

Check out what the cap rates similar properties are selling for. You'll soon learn if it's expensive or not.

 

the kitchen and any fitout/equipment belong to the tenant. at the end of lease, the tenant is liable to make good meaning it is tenant's responsibility to restore to it's original condition/fitout and remove equipment at their cost...

there's pros and cons to commercial.. if that water tank or stove is not working, then its tenant's responsibility, not the landlord.

 

Everything comes back to the lease, best not to assume anything. If the existing fitout was left behind by the old tenant and provided to the new tenant the owner may or may not be responsible to remove/repair/replace, again it all comes down to what was agreed and what is in the lease.
As I mentioned before, if any kitchen equipment is left behind it's usually a liability to the landlord not an asset.

5% annual increases are good, especially if CPI is at 1.71%, but it is all relative to what the prevailing market rent is.
We had a building for sale recently that sold on a 4% yield ($5.8mil) and the main tenant which represented 80% of the annual income had zero increases for the next 7 years (and the previous 3 years).

 

There are some at higher yields however covenants may not be as strong.

High yield reflects lower entry price (inverse relationship to rent) & risk (in all of its forms) - short lease, poor tenant, weak market conditions, functional obsolescence, poor utility, tight liquidity (difficult to find finance), development risk (stock availability/coming on line)

It's all good in theory but you're not buying the business you're buying the building and the cashflow - there's no duty of disclosure on the tenant.

5% sounds great but how long until it is well above market and the tenant relocates or the market rent review drops passing rent by 30%?

 

But CIP and Industrial yields in Perth are very poor at the moment due to the downturn in economy, been like this for at least 4 years+.

As far as the price goes its also dependent on the area and what is currently the going rate for commercial per sqm. This is one way of working out whether the price is realistic.
This is reasonable location in Mt Lawley, and Veggie Mammas is practically an institution in the area

MTR

 

Have you been to Malaga lately, lots of vacant industrial properties, lots of pain.

I would not be comparing prime commercial real estate with industrial properties or commercial properties in the sticks.... I would start with comparing apples with apples and also finding out how much the going rate is per sqm. Its a start, but I am no expert in this area, but just seems logical

 

Seems logical, I agree. Only problem for me is that there are no comparables. I am really just trying to figure out why someone would drop a million dollars on a CIP returning 5%. I can do better than that on resi?

 

Can you push all outgoings, PM, land tax etc to a resi tenant, and have contractual rent increases?

 

This is all correct
Regardless of the fixed increments . ..the market rental is generally more important than the passing rental

 

Hi Beano,
Care to elaborate a bit further please?
Thanks

 

It's fine (for a while) to have an above market rent however it's also a risk:

• Good risk - getting more bang for your buck until the next market review (when the rent will drop)
• Adverse - increases outstrip the tenant's ability to pay
• Tenant falls over triggering a vacancy earlier than planned
• Vacancy may dictate that capital expenditure is brought forward eg: foyer upgrade, a/c replacement, bathroom refurbishment, carpet/ceiling replacement etc
• Tenant arrears increase/payments are slow
• Rental growth is higher than growth of business turnover increasing occupancy costs outside of acceptable/target range (this triggers proactive retail shopping cente landlords into finding a replacement)

 

This is well explained