The 2008 year saw the big end of town in commercial property come under pressure because of the inability of institutions to rollover finance facilities due to the GFC.
To some extent these finance issues have abated and the capital markets are returning to some form of normality. Funds are slowly flowing to the commercial property sector again, at last.
In the next 6 months we will start to see some better quality properties come onto the market as vendors that have toughed it out over the last 18 months start to rationalise their portfolio’s into a rising market. Watch this space for some quality smaller commercial investments.
When the big end of town was under pressure, we saw property prices last year under great pressure and stock levels dried up. The commercial leasing markets became very tough for landlords and easy for tenants. The market has freed up in the later half of 2009, more stock is sneaking on to the market. However if you’re a tenant looking for a good lease hold there are still some great leasing deals about, particularly in retail.
When times get tough you tend to see the more creative come out to play. We have noted a number of properties being sold where the tenant is a related party to the vendor and the rents have been pumped up to help get the sale price to a higher level. Inflate the rental and quote a higher yield and hopefully a higher price will be achieved. Buyers have to be particularly vigilant in checking a commercial property has an underlying value, not just a good rental return. It is important the rental realistically attainable in the event that the property is vacated. A vendor does not want to be left holding a vacant building, particularly if they have paid a premium for rental yield and then all of a sudden have no tenant. A recipe for disaster.
Traditionally the commercial property sector has been the domain of the more sophisticated smaller investor as they have to understand the implications of the trickier financing, more expensive financing, GST issues, business risk, tenant risk and the volatility of the market. Commercial property is more reactive to general economic conditions and can react in a time of economic down turn. Vacancies are not uncommon for up to 6 months and in some cases over 12 months. However if you get it right the commercial property sector can be very rewarding.When you deal with commercially minded players and get the right tenancy mix the returns can far out strip the returns on residential property.
Smaller investors in commercial property tend to specialise in property sectors. Some like retail and will buy multiple properties in selected strip shops, others like industrials and will get into an area and buy multiple factories. Pick a sector that interests you, do the research and commercial property is great fun.
For more expert information on investing in commercial property contact David McMillan at Domain Property Advocates on 9853 5599.
