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5 QUESTIONS WHEN BUYING COMMERCIAL PROPERTY
Australian investors continue to show a keen interest in the commercial property market, often as a way of diversifying business interests, investments in residential property or ensuring returns on self-managed super funds. There are some notable differences when it comes to commercial property, so here are 5 key questions you’ll want answered before making any decisions.
1. HOW IS COMMERCIAL PROPERTY VALUED?
A potential investor will want to know what their return on investment is for a particular commercial property. Agents will generally provide a projected percentage per annum known as ‘yield’. Yield is calculated as a percentage (often between 5-10%) based on the property’s price and running costs versus the income you receive from the property. If this was $1M versus a $100,000 income, then the yield would be 10%. It’s important to remember that yield doesn’t take into account any increases or decreases in the property’s value over time.
2. HOW IMPORTANT IS POSITION?
It’s the original rule for all property investment, but in terms of commercial property, position plays a significantly different and sometimes more complex role. Position is the property’s location and accessibility in relation to the type of business operating there. A property in close proximity to public transport, with good parking facilities and other amenities will generally demand higher rental prices. Position should always factor before the superficial aspects of a property. A modern fit-out in a retail setting will do nothing if the property is in an undesirable location. Poor foot traffic might lead to tenants leaving and longer periods of vacancy.
3. HOW DESIRABLE IS THE PROPERTY FOR FUTURE TENANTS?
Will the property attract a stable tenancy rate to guarantee strong rental returns? If a property or building is in an undesirable location, or it doesn’t suit the surrounding commercial operations, or it requires significant upkeep, then tenants will likely look elsewhere. There’s usually a very good reason why a property has remained unoccupied, so be cautious if an agent spruiks its “untapped potential” or “future appeal” too much.
4. DOES THE PROPERTY OFFER GOOD WALE?
The Weighted Average Lease Expiry (WALE) is what underpins commercial property value. It’s one of the most important pieces of information an investor should use when considering a property. WALE is the average time in which all the leases for a property will expire. Or to put it another way, the average time each tenant leases the property for. A WALE of 5+ years is ideal, as it indicates that vacancy rates won’t be an issue in the short term.
5. IS THE COMMERCIAL PROPERTY MARKET IN A STRONG POSITION?
As with any investment opportunity, understanding the current market situation is critical to making a sound financial decision. Take the time to speak with an agent about what’s happening in the market and do as much research as possible on the type of property you’re targeting.