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Incentives no lure for investors

Wednesday, 2nd Mar 2016

going over contractCommercial property is renowned as a great option when seeking higher cash flow, however buyers can be stung if they fail to look past the headline rental returns.

With typical rental yields of between 7-9%, commercial property is generally ideal for established investors who own a large residential property portfolio and want to diversify as well as those who are nearing retirement and want to supplement their income when they finish work.

However, when buying a commercial property, it’s not uncommon for investors to end up receiving a far lower rental yield than the stated headline figure.

That’s because commercial lease agreements will often have a number of concessions for the tenant buried in the contract.

Subsequently, investors need to go over the sales contract and existing lease agreements with a fine tooth comb.

These concessions, usually known as incentives, can vary significantly but will typically be offered in two forms.

  • Rent-free or discounted-term periods. As the name suggests, this provides the tenant with a period in which they either don’t have to pay rent, or they pay a discounted rate for a certain amount of time.
  • Fit-out, marketing or fixture contributions. This is where the landlord foots the bill or provides the tenant with a cash payment. For fit-out contributions, the landlord will provide some funds for the tenant to refurbish the interior of the property. This might be to renew a dated interior or to furnish the property to the tenant’s liking.

Generally, these incentives aren’t taken into account in the headline rental yield.

Subsequently, it’s easy to see how an investor’s returns can be significantly lower than anticipated because of costly incentives.