Sub $1M commercial warehouses Sydney

There was an article in the AFR today about purchasing small commercial warehouses in suburban Sydney:

Small investors turn to warehouses in hunt for yield

A couple of extracts:

I'm hoping for a net return of between 6 and 7 per cent. In residential you're lucky to get a gross return of 3 per cent," he told The Australian Financial Review.

He paid just $450,000 for the 130-square-metre warehouse and office and expects to have secured a tenant before he settles on the property mid-next year when the Interlink Strathfield industrial estate is due to be completed.

Mr Miles said financing was also not an issue for most borrowers.

"Banks will fight for this kind of business. Interest rates are very good, similar to what you get in residential. Some banks will lend up to 100 per cent," said Mr Miles,

Now on face value this seems like a good proposition. What am I missing here?

Obviously there is the risk of vacancy on completion, but the article goes on to say that there is strong demand from commercial tennants for these type of properties. Is this true?

I am also interested in the claim in the final paragraph that finance up to 100% at good rates may be possible. I don't know a lot about commercial lending but my understanding was that generally lower LVRs were the norm. Which lenders are providing 100% loans for OTP industrial properties without a tennant in place?

Anyone with experience in this area you input is appreciated. Thanks

 

Article is paywalled for me, but the extracts you've quoted make it sound like an advertising piece for off the plan units to me.

 

- It's not tenanted, he's hoping for a tenant
- Shooting for 6-7 net off what figures, what tenant
- It's being bought OTP
- Estate isn't completed
- Finance was not issue, it's OTP and not completed until next year, finance isn't even a question yet

I see a whole heap of risk, obviously with potential sweetener of high yield

Hope they have a tenant lined up and it wasn't just a REA quoting 6-7% net yield possible.

 

Commercial can have long vacancy periods in a slow market. Outgoings will be higher and paid by the owner during this time. Anyone buying commercial should ensure they have a large buffer for when things go wrong.

 

Risky for sure, especially with no tenant.
Are there even lenders who would lend for commercial investment if there is no lease agreement in place?

 

Yup as long as the debt could be covered by other income...

Maybe that's why person in the article said finance was easy, as they're a broker...

 

$200-250/m2 nett for industrial - tell him he's dreaming. These are cookie-cutter OTP strata units. Larger freestanding units will get around $120-140/m2, so people are going to pay twice the going rate for 1/3 of the size? @Shady?

The article say he bought a 130m2 unit but the vendor has said the units range from 150m2. That's inflation for you.

 

Also said some lenders will lend 100%, probably if crossed with an existing resi security

 

So at $120-140/m2 the rent would be around $15-18k/annum from $450k outlay. Doesn’t seem like a particularly impressive yield if that were the case, could get the same quite easily in residential.

The article does read like a media release cut and paste from the broker involved, but the yields did catch my interest. Sounds like they may be a tad inflated then.

 

Add to that, the lack of capital gains which go with residential property.

Reading further into the article, it may be that the purchaser (a broker) has bought a storage unit which is smaller than the industrial units but also has less utility ie no services other than power. @balwoges could comment whether there was money to be made in these small units.

 

12 units of 52 sq ms [all tenanted]
Just over 8% return, minus PM fees as I managed it myself ..
Capital gain was 3/4 of original purchase price at end of 22/23 years
Sold within 3 weeks of being offered for sale.

 

People are paying more net than $140 right now, especially for smaller units. Net is already up to $140+ outgoings in some parts of Western Sydney.

That said, your point stands and is true, ridiculously overselling how lucrative these OTP warehouses are. They’re not.

I should clarify these are for the sub 1000m2 sizes, but especially sub 500m2. Even the 1000m2 sizes in industrial areas like Wetherill Park are attracting nets of $110 (older) to $140 (older but good condition).

I’d assume a brand new small unit in Strathfield might gross in the vicinity of $200+, but the yield after costs won’t be anywhere close to 7%. Heck outgoings can be $30pm2 for a generic old building these days.

Edit: fact checked myself, a standard 500m2 warehouse netting $58k per year has strata contributions around $9k p.a. and building insurance around $4k p.a., land tax is almost non existent , water & council together probably come out to $3k p.a. Making outgoings pass $30pm2

 

I am wondering if we have hit the top of the industrial market. When you see purchases of generic sub 600m2 warehouses starting to hit 4% yields for a strata unit, might be time to sell!

But then there are taxes to consider... and where else do you put your money..?

 

Vacancies are quite tight in most areas which tends to indicate either the economy is bubbling along (ie there's business confidence) or everyone is busting at the gate to drop their leases - unlikely scenario as sublease space is not running wild either, levels of inquiry are down on last year but deals are still being done.

Deals on newer industrial premises reflect changes to the LEP allowing a greater building volume to be constructed ie 10-14m roof vs previous 6-7m adding a further 30% capacity onto a site under the same footprint (at an increased rent of course ).