Hi all,
I’m currently looking at a commercial property deal and just wanted thoughts on how people value the property (without hiring a professional which I’ve been told is in the region of $1500).
The yield looks good, it is a strata title (others in block are own-occ professionals-doctors and the like), new building, tenant seems secure, long lease and I’m fairly comfortable with the location. However, I can’t seem to find direct comparisons between this property and recent sales in the area- this kind of property does not get traded very much. Furthermore, the vendor is going to be the tenant. Apparently they developed the building to suit their needs, and wish to sell to utilise their capital in other ways.
Also, the rent seems (to me) to be higher than in nearby buildings – however, these are older buildings on smaller floor space. This is to the tune of approx $50/yr more on a sqm basis. It is 430 sqm.
Another concern is after the 10 year lease expires, the tenant moves and the rent they have been paying is more than market. Next tenant pays market rent, yield drops, value of property falls. 10 years seems like a long way away, but, if I compound the 3% rise in rents over that time, the difference of $50/sqm becomes almost $30,000/yr.
Any opinions, suggestions or comments are appreciated. Thanks for any help
Munjy
hi munji
from what you just said (10 year lease and 3% annual rises) sounds like you may have a great property.
Comm properties are valued based on their capitalisation rates (gross rental yield). If the cap rate of the area is 7% and yours is returning 10%, then it is worth much more than what you are paying for it.
Basically, in a comm property, you can increase the value by increasing the lease.
The quality of the tennant and the term of the lease also play a role.
hope this helps
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phone 0412 437 582Hi Munjy
As a general rule of thumb property is based on demand, and with commercial property, as you have indicated this is determined by the rental yield and the security of that yield. In other words a good tenant with a good business and a good revenue. With doctors etc there, is it near a hospital? If so then they are more likely to be utilised by them and for a long period of time.
If the yield is good then the vendor must have something very special to want to divert his/her money elsewhere.
If you are starting at a good yield then you are buying well so why worry about 10 years time? The money is made in a good deal at purchase not at sale. Market rates may be very different in 10 years and the difference between your building and others may be even greater. However, there are a number of assumptions made that are pure speculation.
Rental yield is critical and capital gains unpredictable. Will you retain this property for 10 years or more?
Having an exit strategy is important and monitoring the property will assist in effecting a good exit strategy.
Hope that this is of some assistance to you.
Cheers
pr
Hi all,
I would check out what is premium rent for the property. Sale prices are determined amongst other things already discussed, by the return.
I guess its a bit like buying a display home where the builder / developer sells a property and rents back for high rent. This high rent is often built into the price.
But 10 year leases are wow !!!I would check out the tennant’s ability to stay in business for 10 years plus.Or is the lease something like 5 + 5 or 3 + 3 + 3?
Also, who pays outgoings? BC, rates, insurances, land tax etc.
Fianal comment: relatively new building should have heaps of depreaciation.
Looks like a tempting investment, good luck.
hrm
I really have to thank you all for your responses.
Just to clarify, the yield is higher than other properties in the area (and that’s based on the asking price!!!), the lease is 10×10 and the tenant is responsible for all outgoings.
I must say that it looks great. That’s why I’m looking at it in such detail.
It’s been on the market for >2months now and I suppose I feel like there’s something I’m not seeing, because if this deal is as good as I think, then it should have been snapped up already.
I actually have thought of an exit strategy, if I feel that the property isn’t worth the amount that I pay. And that is, in 5yrs time, when the rent has gone up 3% for the past 5yrs, to sell it at that time. A bit of the ol’ bigger fool theory
Thanks all.
One way to find out how much its worth is get a good offer then go to finance. Unfortunately the bank made us pay for the valuation – $1500 I think but that worked in our favour cos it came in lower than the contract price so I was able to negotiate vendor even lower to meet the valuation price. Make sure you go to a lender that will show you the valuation. If you’re paying for it, I don’t see why not. My CP was an exception though, tenants upstairs been there for years paying 1990s rents and no proper lease in place. The shops also had cheap rent so signed up new lease with rent increases factored into soon after. Theres also possibility of strataing later, big block of land..etc.. To me , that was a good buy cos I could do something to it and increase rent – hopefully cap value too. If its just awesome yield straight off the bat and its fairly new, then its a pretty passive investment which you won’t need to do much at all but cap gains will obviously depend on rent increases…etc.. rather than your ability to add value or change its use. My 2 bobs worth. Good luck. Have you looked into the GST side of things yet?
Thanks asdf,
Yeah, I thought about what you were saying. But I just wanted to have a good base from which to negotiate first. Not wait until valuation, then renegotiate based on valuation coming in LOWER than expected. I’m definitely going to make sure I see the valuation.
Agree with your assessment. No way I can add value.
GST: should be sale of going concern – as tenant already in place. Will need registration as rent will be >$50,000. That right?
Munjy
After looking further into the deal, it turns out that I have found the “catch”.
It is a residential zone, but with commercial office allowances. Basically, even though the whole place looks like a small shopping centre, only offices/professionals, etc are allowed in the complex, according to council.
This means that after the lease runs out, my pool of tenants is limited than otherwise would be.
How do people feel this affects the investment?
Munjy
“How do people feel this affects the investment?”
If the are is in demand from those type of tennats then it shouldn’t be a problem.
Also it being residential could mean you could see to a developer.
Hellman
Thanks Hellman.
Anyone else have an opinion?
Munjy
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