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The 3 questions every commercial property investor should ask

Monday, 4th Apr 2016

When buying a commercial property, most investors seek out research and statistics to help with their decision. Property industry publications offer a myriad of statistics to consider, such as vacancy rates, rental yields, incentives, capital growth, land value, and replacement value.

The problem for investors is that statistics are only helpful if you’re asking the right questions. Many investors buy a property based on a set of published statistics, only to find that the actual performance of the property is vastly different. Were the statistics incorrect? Not necessarily – but they may often be irrelevant or incomplete if the investor has simply taken them at face value.

Here are 3 questions to ask to make sure that the numbers stack up before your next purchase:

1. Are these numbers relevant to my location?

Large commercial property research houses tend to focus on locations with a high concentration of property. For office, this means the city centre. For industrial, it might be one or several key industrial locations.

Property vacancy rates and rental incomes vary widely from one suburb to another – even when they are only a few kilometres apart.

For example, in the Perth office market, rental vacancy rates can range from 2% to well over 50% between different suburbs. An investor buying an office property with the CBD rental vacancy in mind may find this to be a poor predictor for their suburban property.

2. Does size matter?

Many commercial investors are working to a budget, and this may influence the size of property they consider for purchase. In other cases, property investors will opt to buy several smaller properties instead of one large property as it feels “less risky”.

This would be no problem if property performance was consistent across different property sizes. The truth is, however, that the size and the grade of the property have a significant impact on its yield and vacancy over time.

Generally speaking, the smaller properties which are well-suited to owner-occupier buyers are not well suited to attracting quality, long term tenants. Not only does the rental yield fall behind for smaller properties, but a smaller property is likely to fall vacant more often, resulting in lost income and higher re-leasing costs over time.

Is larger always best? Unfortunately, having a larger budget will not always result in a higher return – but it does open up more opportunities to source a quality property. For some buyers, this might mean choosing a different location in order to buy a higher-quality property. For others, the best option may be to invest with others in a property trust, and own a small percentage of a high-performing portfolio rather than having 100% ownership of a smaller property.

3. What hidden factors have influenced the rental yield?

Commercial properties are generally advertised with a passing yield. This percentage, on face value, might draw an investor to a property or prompt them to dismiss it.

Unlike residential property, where sales records are fairly transparent, commercial leasing and sales results can be influenced by factors which are not on record. For example:

  • An office has a high rental yield – however there are several incentives built into the lease which will lessen the yield over the next 2 years
  • A seller is offering to lease back a property at an above- market price, but a credit search reveals that the business is in trouble and may not be able to meet the lease terms long term
  • A retail property has a below-market yield, however it turns out that there are new managers coming on with the supermarket tenant which will have a positive impact on the performance and income of the centre

Without professional connections, it’s very difficult for investors to access all the information that’s relevant to each individual property. This missing information can prove very costly for investors who buy without seeking advice.

At Momentum Wealth, we help commercial property buyers to make more confident purchasing decisions. Our specialist commercial property team help owner occupiers and investors throughout WA , using thorough research and due diligence processes to ensure that only the best properties are recommended for purchase.

Want more information? Get in touch with us here!