Economic conditions have delivered a new crop of first-time investors to commercial real estate markets tempted by high yields. “Last year we saw both vendors and buyers adopt a ‘wait and see’ attitude,” says Ray White head of research Vanessa Rader. “They were more cautious in coming to market and transacting in an uncertain economy.
“This year however we have seen transaction levels soar.”
But property analysts watching the steady influx of first-time investors into commercial real estate believe most newcomers need to tread more carefully than they anticipate. Commercial real estate may carry the promise of greater yields and – in many cases – a “set and forget” style asset – yet also requires higher levels of due diligence than residential property to ensure an investment runs smoothly in the long run.
“What we’re seeing is people buying based just on yield and paying good money for assets,” Ms Rader says. “But there a quite a few things buyers need to check first - as they could lead to a big bill in five or so years’ time and gouge a hole in any financial gains.”
Here are a few key points a first-time (or even experienced) investor can overlook:
Delving into the exact zoning rules and regulations governing the location of your potential commercial property investment is imperative. “Just because a tenant is operating a certain type of business in the commercial property you purchase doesn’t necessarily mean they are permitted to do so,” Ms Rader says. “Issues arise around these sorts of scenarios more often than many people think.
“Food retailing for instance is quite specific simply because there is a whole other level of health and safety involved.
“It would be a great idea to have a café in the middle of a factory area, but it may not be permitted within the investment property you have just purchased.
“This is an area that is not straight forward.”
Knowledge of zoning specifications also allows you to plan for best possible uses of your investment property in the future. “Maybe you’ll be able to redevelop your asset or subdivide in a way that will give you a greater return in the future,” Ms Rader says. “Buying a service station on a highway is great but what if the client moves out in 10 years’ time and there is the possibility of developing a residential tower on the site?”
Unauthorised building works can cause financial woes down the track. “Often we see assets which have been added to and amended over the years,” Ms Rader says. “So be certain that the property you are purchasing has the adequate approvals by checking with the local council that its use is permissible under the current zoning.” Doing so can avoid being hit with hefty fines for non-compliance with building regulations.
Be sure to check for those things you cannot see especially when buying older industrial property. What building materials were used? Issues around asbestos in walls and roofs, and subterranean tanks such as those used in petrol stations are some of the more common problems that trip up landlords.
“Asbestos for instance may not be a big deal today but it will be in the future. These are the sorts of issues that can lead to pricey situations to fix up a property or remediate a site to make it suitable for new tenants or for re-sale.”
The profitability of any commercial asset, from retail to industrial, is unpinned by key fundamentals. This is why it pays to investigate what is going on in and around the location in which you are purchasing – such things as occupancy rates, population growth forecasts, area demographics, and new businesses. Is the area primed for prosperity? Local councils are good places to start this kind of in-depth research and can furnish you with future plans for their LGA in regards to business and development. “People will look at an investment opportunity like a toy shop and think it’s a good buy because the tenant is there for another five years – but what if there’s a new development planned close by and my client decides to move out in favour of setting up in this potentially more prestigious or favourable location?
“This is the sort of thing a sophisticated investor would look at and what a typical residential investor may not even think about considering,” Ms Rader says. “It’s good to be aware of what is planned for an area and be able to anticipate if a bigger, better development than the one you’re buying in now could steal your tenant.”