The Sydney residential market has been fire, but the commercial...

It has been quieter in the commercial real estate than residential (Sydney). Does this mean that there is room for commercial to play catch up?

What are the significant factors contributing to commercial real estate that mean it performs at such a flatlined rate?

Perhaps it is:

- Reasonably flat rents for the last decade
- Abundance of opportunity for large storage spaces/logistics out west
- Becoming more difficult/unnecessary for businesses and entrepreneurs to tenant commercial
- The approx 30% minimum deposit in best case scenario investments (tenanted, good history, useful)

Perhaps something else?

How has the commercial market historically performed, relative to the residential?

I understand the commercial market is much more diverse than resi, and thus is more difficult to paint with the same brush strokes. But which particular segments are due to perform well, and which will slowly die off? Is the region ultra important?

 

Not the same opportunities in Perth, the mining boom is killing CIP yields
ABC

'Rents could more than halve in Perth'
The commercial real estate market is reflecting the transition of the Australian economy from the mining boom, to services-driven growth.

Vacancy rates in Sydney and Melbourne have fallen to single digits, but in Perth and Brisbane they are closer to 20 per cent.

"A lot of the office REITs have a big exposure to Perth," said Mr Hannon.

"We don't see that recovering. Rents could more than halve in Perth."

Despite those pockets of weakness, David Rees from property management firm Jones Lang LaSelle remains optimistic about the broader Australian market.

"I think in most sectors the market is reasonably well balanced," Dr Rees said.

"You look at the retail sector, you look at the pipeline that is coming through in construction. You make the same observation about the industrial sector."

Dr Rees said, while demand from financial services firms is softening in some areas, other industries are filling the void.

"In the last 12 to 18 months there has been a big increase in demand from technology - from IT companies. Small IT companies, quite big IT companies, who we always used to think were the fringe dwellers operating on the outskirts of the CBD," he added.

 

My sister in law is in the market for a commercial lease in the St George area of Sydney to run her beauty business from (she currently operates from home). There's plenty of vacancies around but everyone seems to want to charge a fortune (some have asked for over 100k p.a. for a smallish shop space with limited parking) and would rather go empty than put someone in a bit cheaper. With so much choice available for tenants, I wouldn't be betting on that space increasing in value anytime soon.

Out of curiosity, what is the market rate per sq m for a ground floor shop space with say half a dozen parking bays and hot water?

 

According to the media and the various vested interest experts...the economy is cruising along just swimmingly.

Therefore, no idea what would cause the above.....

But seriously; Banks are not playing that nice for Comm lends for businesses, the overall business mood is not over-excited to say the least; the mining slump, lots of other "high profile" business closures and losses etc - make folks nervous and reluctant to invest in moving, or start-ups, or expanding etc

Low inflation and interest rates poised to drop even further are a bit of a clue.

One anecdote for ya's - a bloke I know is a shopping centre manager for a Group who own/manage a number of these places both here in Melb and countryside, and interstate....vacancies across their portfolio are historically around the 6-8% range, but in recent years it has blown out to around 15-17%.

 

Its easiest to make a quick phone call to one or two agents in the area. Or look at comparables in listings. Rent listings almost always have an explicit price (unlike for sale listings).

One theory that I have heard of, is that in stagnant periods, commercial tends to chug along just fine, so long as you have something reasonably unique and easily tenantable, you should do well, and its likely to outperform residential. The stagnant period for the real estate market is bound to happen with how interest sensitive most new loans must be!

Part of the reason why I bought commercial > resi recently.

I guess the key is to find reasonable levels of desirability/affordability. Its easy to appraise how affordable a place is, but desirability depends on location + uniqueness.

 

The right type of commercial property can be a goldmine (particularly if you are developing).

There are several advantages that commercial properties have over residential properties. Firstly you generally have longer leases and the tenants pay for the outgoings. Residential tenancies generally last for 12 months whereas a commercial tenancy can be anywhere from 3 to 10 years. Commercial tenants generally have more vested interested in the property since it costs a bomb to fit out the property. Having the tenant pay most of the outgoings (rates, council, body corporate, etc) also helps the new yield.

The downside to this however is that finding commercial tenants is generally harder than residential tenants. This is why lenders will not lend for vacant investments (unless the loan services without the proposed rental income). Therefore you do need to factor in potential long vacancies. There are a couple of commercial agents on this forum that can comment on this in more detail.

The yield is going to be dependent on the location and type (warehouse, retail, industrial, etc) of property but I would aim for anywhere between 9% to 12% gross.

Im not going to go into the finance side of things as I could write a few pages on this but with the lending changes and price increases in the residential space - commercial properties are relatively cheaper and thus the deposit required is also a lot less. So its an attractive way of getting into the market.

Commercial properties are very sensitive to the market and area. When selecting a property you really need to understand the fundamentals of the area, business, market and economy. I say this because there is a significant correlation between the value of the property and its lease.

Guess what happens to the value of the property if the lease significantly increases or decreases?

Also imagine if a development near by opens up and lure your tenants away from older commercial properties?

I think commercial properties are fantastic but like anything you really need to understand the fundamentals of the investment before jumping in. Get a feel for finance, the area, the type of security, the industry, the market and the economy.

 

I wonder how Dazz is faring. He was always cognisant of tight clauses in his lease contracts but even then, one is never immune to the state of the economy.

 

no one is immuned when markets crash and yields have gone backwards been some time now. Also lots of empty factory units etc, many business' that reply on mining and there are more than a few are feeling the pain. Many trying to entice tenants ie 3-6 month free rent..... things are that bad in Perth.

I think the difference here though is he purchased in the early stages of the cycle in 2001-6 last major resi/cip boom and his properties have probably tripled in value??. My guess is even with this bleak scenario the rents will still probably provide a very nice income stream.

I see he is back into political game again

 

3-6 month incentives are completely normal for 3-5 year leases in a balanced market, atm you can get significantly more, some office spaces have gone for 50% incentives on top of reduced rent to start with

 

Really, I have not looked lately. Would not want to be holding CIP at the moment in Perth

 

@Shahin_Afarin excellent post thank you. It is a shame we couldn't organise financing , I was in a rush so used a different broker when you were too busy. I recently purchased a 5.6% gross yield (gst taken out) but it pays itself off while I wait to develop the block so can't complain.

I hope to speak to you further in the future

I do agree that you have to be extra cautious with commercial, it's much easier to be forced to sell. High reward - high risk.

 

Commercial is going gang busters on the Lower North Shore of Sydney....maybe not as cray as residential over the past few years but cap rates are tight, vacancy is low and incentives almost halved compared to 3-4 years ago. There's little stock around and plenty of demand = formula for rising prices and rents.
There's no relief in sight on the supply side of the equation and an increase on the demand side driven by the demolition of commercial buildings.

 

Is the 5.6% gross yield also the net yield?
Is this bare land about to be developed?

 

The outgoings are on us, but net yield is still good. It is an old free stander on pretty decent sized land with b7 + 20m building height zoning.

 

You need to know your commercial very well. I often cite the example of a CIP I have in the city that gets 5-6 tenants fighting for it every time it vacates. It now houses a top 50 Aust restaurant (according to the recent rankings on Fairfax anyway).

Also have buildings a block behind this same location, have an empty shop sitting vacant for 4 months now.

 

An empty vacant shop is a sure way of loosing money every month. Have you been advertising it?

 

Me neither

Rental income has a large infuence on the value of CIPs.

 

Just been advised of an office which has sold on 9% nett yield with 1 year remaining on the current lease.Good lower north shore location.

I know that there's another larger on on the market too in the same complex. Around $1m

 

Lease back?
Most of the strata investment we're selling at the moment is under 6% net. buildings being sold at high 3% to low 4% yields.

 

@Shady - not afaik however it wouldn't surprise me. I had done my comps on it, deducted the value of parking spaces and thought that it was decent value at the numbers spruiked & would still work if it were a semi-gross rent.

Demand is strong for the type of property