Six common mistakes made by commercial investors
When it comes to searching for the right commercial property it can be difficult to know where to begin, but there are six key mistakes to avoid.
As Australia emerges from the pandemic business confidence is growing in the wake of lockdowns, while at the same time affordability issues are starting to slow residential property price growth, particularly in Sydney and Melbourne.
In a sign of returning commercial property sector confidence, overall commercial property lease lengths across the retail, office and industrial sectors have increased in the past year from 1.99 years to 2.09 years. The number of Australians working from the office has bounced back to pre-Omicron levels, and industrial and logistics assets are smashing investment records.
But when it comes to searching for the right commercial property it can be difficult to know where to begin.
It’s important for investors to understand what works and what doesn’t when investing in commercial property.
Six common mistakes to avoid:
Chasing yields only
Over the years I have seen new or novice commercial investors drawn to commercial property because they are attracted to the amazing yields. Chasing only the highest yields can result in added risk, leading investors to ignore other investment fundamentals such as lease security, growth or value add opportunities. For example, if chasing a risky 9 per cent net yield with a tenant in place who is paying too much rent per square metre, what happens if that tenant leaves?
The new tenant pays less rent and not only have you lost some of your yield, but you have also lost capital value. Sometimes the best commercial investments might have a more normalised yield (5-6 per cent) but will give you more growth and security than a sketchy 9 per cent yield.
Only looking locally
Some investors love the idea of being able to drive past their commercial property regularly.
One recurring theme seen now is incredibly low stock levels. Investors only interested in investing in their local area may wait a long time to see a commercial property surface in their specific price range.
This is especially true when broken down within the asset classes. For example, imagine you want to buy a medical centre within a 15 kilometre radius of where you live for under $5 million. This might be a once in a 15-year opportunity. So how do you get past this issue? Simply cast the net wider and be open to locations beyond your own backyard. You can then review more deals, invest in markets with greater yields and growth potential, and purchase faster rather than missing out on time in the market.
Giving things away without getting something in return
Whenever we negotiate on a property and we give something away in terms of price or stronger terms, we expect to see some sort of compromise from the vendor. Think of it as the give and take of business dealing. For example, we never like bidding against ourselves. Many vendors might reject our offer because it’s too low. They ask you to raise your offer. This is a big mistake, as you are increasing your price yet the vendor might not have even committed to their sale price. In that case I always say to the agent or vendor - come back with a counteroffer or we are out. This can save you a lot of time and money.
Negotiating with the wrong attitude
A deal will never be made if both parties don’t agree on a final position. We therefore like to make sensible offers that work for us, and then make sure we understand what the sellers need for the deal to work for them.
With no emotional distraction, no one is offended or frustrated with the process. If you can work like this, more deals will go in your favour. Someone who tries to ‘crush’ the sellers into submission with a very lowball offer is a poor negotiator. Trying to defeat the other party is not the attitude you should go in with. Negotiations are not wars; they are pathways to a mutual agreement. Work with the sellers and they will work with you.
Neglecting the fundamentals
One of the common mistakes we see investors make is only concentrating on value-add opportunities rather than the deal as a whole.
For example, we were once dealing with an investor who spent time in a property seminar and that seminar was all about value-add strategies. So naturally, that investor wanted a big value-add opportunity. We found them a deal that offered an instant 20 per cent uplift but more importantly the investment had a 7 per cent net yield in a high growth market. They turned down the deal because in their head they wanted a 30 per cent uplift.
This was never going to be possible in that market. Blinded by their 30 per cent number, they turned down the deal and have not purchased since, missing out on one of the biggest commercial growth markets we have ever seen. Always look at the deal as a complete package.
Taking your finger off the pulse
It’s easier and wiser to outsource to people who know their stuff, however, many investors look to save money on rental management. This can be a good strategy if you are an experienced commercial investor with a good business mind and time on your hands. However, if you have other priorities, maybe it’s best to leave the management to a local professional.
Make sure you check up on these professionals though. Leaving them to their own devices is a mistake I have made in the past only to see some outgoings were being incorrectly charged to myself and not the tenant.
And finally, always be sure you know what you’re getting yourself — and your money — into.
To get the best deal, you need to do your homework thoroughly. And if you can avoid the above, you’re already a step ahead of the rest when it comes to purchasing a quality commercial asset.