Why Commercial ?

Generally i don't buy properties that are part of complexes
I prefer owning the whole complex
Yield wise it looks ok but you need to look at the market rental and compare to the passing rental

 

skill certainly is required!

Would you say that a big advantage of commercial is the net yield vs cost of funds gap? e.g. if your net yield less cost of funding is 2percent, and you have a tenant for 5 years with 3.5% increases, its very easy to drop the LVR over that period (especially if you can get an offset).

In regards to "why commercial" right now, What would you do in the current environment? Do you think that interest rates will continue to drop over the mid term or will they stabilise/rise?

 

Having looked at vacancy rates, tightness of the market, the low % increases in land values (in some industrial areas according to the SRO) - it may be worth a look at these.

 

What's the best way to determine market rental for CIP? I assume easiest is if there is an exact same property in the complex, then one can find out from the agents?

But what if the CIP is standalone or not part of a complex? Would it best to then find similar types of properties nearby (say warehouse, retail, etc) and compare rent per square metre?

 

@pwt - You need to look at comparables - agents will tell you what they've achieved, incentives, contributions etc

 

Talk to agents and valuers ...they have the details

 

This may interest some

Tide turns in Australian commercial property market amid Chinese resurgence | CBRE

 

This affects the mid and upper market, plus the development sites but it probably will not affect the lower end (sub $20m where most of us PC lurk in)

 

Didn't read all your questions, but as someone who now has more commercial/mixed use than resi, here's why:

- better legal protection vs tenant, they can't just walk out
- ability to charge 6-12 month bonds
- you normally don't pay any outgoings except land taxes, although some tenants also pay land taxes
- rents go up much quicker
- when there's lots of apartments, your houses are going to be monumentally in trouble. But the shop downstairs will get monumentally busier

 

I was reviewing land tax bills for a few clients over the last week.

Several had a comparatively low land tax bill and higher rentals than those with the equivalent land value of residential property in the portfolios.

 

How do you increase the rent? Aren't they generally yearly increases in line with CPI? If interest rates rose 50 basis points next week, wouldn't you need to wait until the next lease renewal?

Also, is there a book that anyone could recommend for commercial?

 

The details of rent reviews are in the lease.
The reviews can be as short as a month or i have seen 99 year reviews too.
The reviews are really what are agreed
My reviews range from a month to 12 years.

 

Empower education in nz produce a commercial property book

 

Depends what you're buying

Rents are either CPI, or 4% generally. That's faster than most resi. That said some premises have their rent tied to the tenant's revenue. Most leases also have a market review clause every few years.

 

There is no 'generally' in CIP leases each case is individual.

There are many mechanisms for rent review but typically CPI, fixed %, fixed $, CPI + %, market review.

% rent is not a review type and only used in some retail applications eg shopping centre leases. Rents may be set artificially low to attract a tenant but triggers turnover rent at a low level of sales or at a high level so that it's not triggered. Turnover rent have high compliance costs eg monthly turnover statements and annual audited returns.

 

I must say most CIP either as landlord or tenant I've come across are CPI or 3-4% increases. Although I just look at a small market, mainly CBD, for retail.

% rent - I was thinking supermarkets in particular so I guess that's like what you said.

Most of my market reviews occur around 3-4 years in, typically over a 8-10 year lease. Although I'm aware we have one as a tenant on a 20 year lease, where there's on only review midway.

 

Perhaps one of you commercial guru's can help me understand. I was at one of the property 'expert' sale seminars yesterday (Helen Tarrant), and she mentioned how commercial property was always growing at 3-5% p.a. This is due to the built in rental increase of 3-5%.

Using one of her examples:
Year 0. Current value: 660k
Rent: 40k
Rental Increase: 3%

Year 1:
Value: 680k
Rent: 41.3k

Do those figures look correct. I'm a bit skeptical a 1.3k increase in rent equates to a 20k increase in capital gains. Is that logic correct??

 

I'm going to say.... What if your tenant walks? Then you've got an asset worth less than it was worth previously. So #1.... You need a secure tenant.

 

My understanding is that banks can also ask you to lower your LVR if it's untenanted? So like a margin loan.

 

the banks may implement annual reviews whereby you are required to produce financials/docs if loan amount above a certain figure each year - if the property is untenanted for an extended period or if the annual review picks up anything adverse, it will be a credit decision as to whether they allow the facility to be unchanged/extended - otherwise the bank can implement certain actions, an avenue of which would be to reduce the existing limit