The Secret To Buying Great Commercial Property - August 2021
August 27, 2021 / Written by Rich Harvey
Experienced residential investors have been expanding their horizons and moving toward a new property sector in recent years – but there are a host of risks for those going it alone.
I’m talking about commercial property where the upsides can be excellent… if you know the who and how of asset selection.
Commercial property is mostly an investment play. Buyers remove the emotion and analyse only on the numbers. It doesn’t matter if you don’t like the paint colour or the roller door profile, just so long as you’re receiving the right rent and it’s on time.
Also, commercial leases tend to be longer. This means less vacancy if you have a secure tenant in place. Tenants are also responsible for covering most outgoings – so the rent on the lease is pretty close to the income that lands in your bank each month.
As you can see there’s plenty of upside to the commercial sector. But there are some distinct differences between buying a commercial asset and investing in residential property that can catch out the amateur investor.
Who’s who in the commercial zoo
When it comes to commercial property, there are several key stakeholders, and the way they interact is crucial to the buying process.
For starters, the strength of your tenants is key to ensuring the robustness of your investment.
In short, successful tenants make for successful investments.
So, while your asset can have plenty going for it – new construction, a heap of onsite parking, decent access to major transport routes and good exposure – unless you attract and keep the right tenant, its value and your future income can be affected.
Next are the commercial property managers who must have special skills in their field. Lease terms in commercial can vary widely from those normally seen in residential.
As already mentioned, there tends to be long-term leases with set renewal periods. Then there are the range of clauses about who is responsible for what. For example, tenants often take care of most, if not all, outgoings.
There’s also the matter of rent reviews and whether they’re assessed to market or updated in line with CPI. Only commercial property managers who are experienced in the field will have the ability to apply these clauses appropriately.
Then there are ever-changing lease laws and responses to the unexpected. Recent COVID events are an excellent example. Various state’s based Commercial Code of Conduct legislation introduced during pandemic added a challenging layer to the process of commercial property leasing. Unless your property manager was right across the changes and was able to manage your tenant’s challenges and expectation, you were at risk of being left with an empty building or no income.
Another important player in commercial is the financier. Finance for commercial property differs from that off residential.
Commercial finance loans run for shorter periods and usual require renewal every year or so. This is a risk mitigation move by the lenders who need to know your lease is running to plan and there’s no imminent threat of your tenant vacating.
Two very important players
There are two more key players in the commercial transaction space that probably don’t get as much attention as they deserve.
The first is the selling agent. In commercial investment, a selling agent’s role varies from that of a residential agent in some fundamental ways. For one, commercial selling agents aren’t usually bound by geography. Instead, they might concentrate primarily on property types – say industrial, office or retail, for example.
They also tend to be more analytical. They understand that their buyers are purchasing yields and will be aware of what returns are being achieved in their speciality market. They also cater for owner-occupier buyers in this space, but know they are competing directly with investor in most instances.
Commercial selling agents also work a little more favourable toward the buyer than residential agents do. The commercial players know today’s buyers are tomorrow’s sellers.
And here’s where the next important professional should be involved.
Specialist commercial buyers’ agents do an outstanding job looking after their clients.
It’s important to remember that residential buyers’ agent rarely have the experience or connections to maximise results for their commercial buying clients.
For starters, the network of commercial buyers’ agents and sellers’ agents is tight. You need to be in the loop with what’s coming on the market. You also need a buyers’ agent who can quickly analyse the property and determine an appropriate market value. Commercial buyers’ agents understand leases and know how to assess the strength of tenants.
And commercial buyers’ agents also grasp specialty yields and have a far more analytical approach to their property types.
They can speak the commercial selling agent’s lingo as well. We find that negotiations around commercial properties are more ‘corporate’. Both parties know what’s reasonable and understand the formulas. It’s often just a matter of matching the right property with the right buyer.
Therefore, using a specialist commercial buyers’ agent is essential.
So, if you’re in the market for a commercial holding – whether it be as an investor or for owner occupation – it makes sense to engage a buyers’ agent with experience in the field. Don’t just go with an everyday residential buyers’ agent when you can draw on our team’s experience in the commercial realm.
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