Commercial property auctions are cranking into gear as much as residential now that spring is on its way, raising the chances of that property you have your eye on going under the hammer. If so, being well-informed across all aspects of buying commercial real estate can become more important than ever – as your pre-auction due diligence will be as much the key to calm, sensible bidding as it will to a successful outcome, as these following auction tips explain:
1. Know what you want:
“Create a commercial buyer’s brief,” advises Rich Harvey, buyer’s agent and CEO of propertybuyer.com.au. “Otherwise you’ll be looking everywhere at every type of property. Identify the asset class you want - whether that’s industrial, retail, medical and have clear parameters about what that property needs to deliver for you.”
2. Then understand what that asset class means:
While it’s all well and good to have a cheque in hand, ready to buy on the spot should the auction go in your favour, the loan to value ratios will vary depending on the asset class you’re buying. “Don’t go into these things unless you have done your research,” warns Anthony Bray, director of sales and investments NSW for Cushman & Wakefield. “Understand the nature of the asset class you are buying and most importantly, how it is viewed by the bank.” This is because unlike residential where loan to value ratios are fairly standard, commercial LVRs can vary widely. “So if you’re buying a petrol station for instance, and say it’s 25 years old then the bank may only lend you 50% of the purchase price which is a problem if you thought you could borrow 80%.”
3. Carry out due diligence:
As with buying residential, having a building and pest inspection report carried out is highly recommended. You want to know whether the building is structurally sound, if renovations are required or if it contains materials that may have to be removed such as asbestos.
“If you’re buying into a strata get a strata inspection done and speak with the strata manager to make an assessment on whether it’s a well-managed strip,” Mr Harvey says.
4. Do not skimp on due diligence, either:
Pre-auction due diligence is important in all cases and even more so when a buyer is intending to use their self-managed superannuation fund.
“This is when carrying out extra due diligence is highly advisable especially into the potential for future vacancies – as vacancy becomes the biggest risk factor when someone is using their SMSF,” Mr Harvey says.
“This would also have to be one of the biggest differences between buying residential and commercial property, especially as a property’s value is also largely determined by the value and quality of the lease. The value is very much based on the capital rate which is based on the lease.”
Also, when purchasing in a company or superfund make sure all paperwork is done and set up correctly.
5. Understand the GST aspect:
Again, this is another big difference between buying commercial and residential. “You need to understand your tax liabilities particularly with GST,” Mr Bray explains. “If it’s sold as a going concern with tenant you won’t be responsible to pay GST on top of the purchase price.
“However, if you buy commercial property that is vacant you will have to pay GST before settlement which is excluded from and on top of the purchase price. Depending on your tax structure you can generally claim that back, but you have to make sure that the structure is there in the first place. GST is not funded by the banks - it’s up to you to pay it.”
Buyers in this situation also need to know that GST must be paid before banks will settle. “Being 10% of the value of the property, the rules around GST is a big one to be aware of,” Mr Bray says.
6. Buyer beware the dummy bidder:
Another key difference between residential and commercial auctions is that commercial purchasers are not required to register. “With the smooth operators you would never know if they were real or not and that means that sometimes you have to be careful you’re not bidding against yourself,” warns Mr Bray. Frustratingly, there is no hard and fast solution and while one would hope to strike honourable people, the fake bidder is definitely one to look out for.
7. Seek expert help:
Using a buyer’s agent to bid on your behalf can help lower the risks of falling foul of the fake bidder. Also, a buyer’s agent can find hidden purchase opportunities, as they make it their job to seek out off-market properties for clients.
8. Research – then go the extra mile:
“Even more than residential, with commercial property it’s very important to get advice on the property’s location and the risk factors regarding that location,” Mr Harvey says. “The yield can be a reflection of the risk – a property with an attractively high 9% to 10% minimum gross yield may come with a high risk of vacancy because of its location on the outskirts of a region whereas a property with a lower yield in the middle of a busy city area carries a low risk of becoming vacant.”