Yields in commercial

I am trying to get into the commercial market in Adelaide. In doing this, I have read up as much as I can, talked to people who I know (not many) that have commercial properties to understand how they do it.

I have also been keeping a close eye on the property market. The properties that I have followed (and bid on) have all come in at yields of 6%, which is very different from all the recommendations and articles that I read (where it mentions to aim for yields of 7-10% depending on type of investment (retail, offices, warehousing).

So I was wondering what yields everyone is seeing on the market in the last year or so. Has these yield theories changed due to the current low interest rates? As it seems the majority of properties (no matter what types, are all in the very low yield category).

Any help or guidance would be greatly appreciated.

 

Net yield of 6% on commercial doesn't sound compelling. How would those you were looking at have helped you reach your goals?

 

A 6% yield might happen for a lower value property that has a strong tenant (bank etc) in a good area. For sub 2m investors you are competing against an army of investors who are happy to take tighter yields because they are comparing commercial to resi.

 

Each asset class has a different yield, retail tends to be lower than commercial which is lower than industrial. You can have a 5-6% yield spread across these categories.

The most recent KFC sales were between 4-5% in Sydney and Melbourne yet I have seen other office premises sell at 9% only weeks earlier (short lease remaining). Even this one sold at a higher yield but is a little outside of your price range methinks.

Yields will be compressed when there is more competition for the asset as @Ross Forrester points out - plenty of competition in the sun-$2m market.

Read reports from JLL, Knight Frank, Savills & other commercial agents who have a research division.

 

Have a chat to @DaveM who is a BA in Adel that can help with commercial here.

 

Thanks for the advice. I have also been told the bigger yields are in the $3m and above listings. Unfortunately this is outside of my reach at the moment. Looking to start in the $500 to $1.3m mark, which is smack bang in the high competition area. Which is probably why majority of the properties (whether retail, commerical or industrial) are all sitting in the 6% mark.

"Scott no Mates - couldnt access that link sorry, as it required a subscription". Thanks for the tips though, I will look over their material.

Thanks D.T. I have actually tried to contact him on multiple occasions (email and called) but with no reply.

 

Why so low?
Is it because of long leases with built in annual increases, so that in 2-3 years, yields might be back up to 10%+ on current val?

Is it worth considering taking a punt on vacant properties for a cheaper buy in then securing a tenant ASAP at good yields vs an already leased property at lower yields?

 

Why so low - people eat this $#!+, perceived quality of an international tenant/strong covenant, better return than banks, the tenant has alot of goodwill tied up in the site, tenant has probably built/extended the building (buyer may not own the building, just the land) etc.

You'd be lucky to be getting 3% pa fixed rent increases but more likely cpi (so even less). With 3% pa nett increases, yields will have increased to a whopping 5.87% after 10 years. Selling at the same yield in 10 years only gets a 30% premium on the initial purchase.

To achieve 10% yield (on purchase) after 3 years, the annual reviews would need to be 30% (10% annual increases would result in 10% yield after 10 years), slightly unsustainable.

If you're able to sustain a vacant property, & do your DD, buying vacant can be a good option as you will determine the purchase price.

 

Looking solely at yields can be a falsehood.

I have seen plenty of people buy a commercial property with an 8 or 9% but haven't looked at the future Capex works, whether the tenants will remain past their term etc or a myriad of other factors that would significantly eat into that yield.

 

Some very rough cap rates for the Perth market that I have found to be true if you want to see if that is similar in Adelaide - it may help you target what type of CIP you want.

Car Services (tyre shops, listed car workshops) 8.25
Show Rooms 8.25
Fast Food 6.25
Fuel/Convenience Store 6.50
Restaurant/Cafe 7.0
Retail 6.25-7
Gym 7
Medical Centre 6.50
Swim School 8.25
Day Care 6.75

The lower the cap rate the better and they tend to be determined by buyer demand - at the moment everyone wants to own a medical centre, fast food or petrol station.

Cap rates explained better than I can How To Use The Cap Rate To Value A Commercial Property

 

Swim centres & showrooms are very user specific - eg. not all restaurants want a pool in their floor area. Car showrooms are very much in favour with refurbishment boom having passed its peak (in Sydney at least) - these will be stable for another year 10+ years.

 

Recent article from The Strine newspaper - Scentre targets 7.5% returns and 15%+ IRR on refurbished centres.

 

Hello guys, newbie here. When we're talking about yields in this forum, are we talking about net yield or gross yield?

 

Generally we are talking gross yield. For commercial gross and nett are often pretty close as commercial tenants can/may pay for PM fees, outgoings etc etc

 

I only consider net yield (excluding borrowing costs, management) as everyone's situation is different.

 

I only talk net yields ...so net rental is the net yield (one is the $$ the other the %) ...take the interest and tax off it and it becomes net profit ...take the principal payment and capX off it and you get the net Cash Flow ...

 

@Beano what is capX?

 

Depends where, and I would have no idea about Adelaide let alone where in Adelaide. For example, CBD in Melb and Syd now scoop as low as 2% for non-development sites (sky high prices), and typically 3% or so.

 

@ 2%, that is 50 years to recoup the cost based purely on net rental. CGs have to exceed higher yielding CIP significantly for that to make sense. It sounds like either rents have to increase significantly to catch up or market has to come down to earth.

 

@RickProp - owners are on a hiding to nothing.

Unless the own ground-floor retail which is scarce, every upper level is up for grabs with stiffer competition. They're not building any more streets but they are building towers.