Things to Know About Buying Commercial Property

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Things to Know About Buying Commercial Property
Things to Know About Buying Commercial Property

When people think of interest rates they typically think of the housing market and investment accounts, but what about Commercial Property? The Australian housing market has been in recent news first for the out of control escalation in home prices, and now for the slowing home sale market.

Both of these circumstances will directly affect the housing market’s interest rates. So, how does it affect the commercial property real estate rates and what should be considered when considering purchasing commercial property within Australia?

According to the Australian Properties Monitor’s (APM) April 23, 2014 report the lowest quarterly growth in the past year for both unit prices and National median house prices were recorded in the 2014 March quarter. This is the first indicator that the seller’s market ultra high home pricing may have hit its peak. by a mere 2 percent Australia wide versus the four year high of 9.48 percent in 2013. Part of this slowed increase in home prices is directly due to an increase in the number of homes currently entering the market.

RP reports state that there were 20 percent more home listings in the first half of April than in the same time frame a year prior. With more home owners looking to sell their homes, the supply and demand principle is beginning to affect housing costs. This means the more of a product there is available the lower the cost to the consumer will be as sellers try and unload their goods, in this case housing; just as if there are fewer of an item the higher the price a seller will be able to receive for the item as more consumers bid to purchase the same item.

Another cause for the slowing in home price increases is the shortage of affordable homes. The out of hand over valuing of homes has created a scenario where there are insufficient buyers  who can afford the astronomical housing prices that have been escalating over the past four years, giving Australia the title of being one of those most expensive housing markets in the world. Experts have been projecting this sort of slow down for months anticipating the housing market’s escalating faster than cost of living wage increases.

Record low interest rates of 2.5 percent in 2013 helped perpetuate homes sales while unreasonable sellers asked for ridiculous prices. However, as interest rates begin to rise, more homes saturate the market and fewer high dollar buyers become available, home sellers will begin to negotiate more reasonable and closer to value prices. The slightly higher interest rates will be offset by the substantially lower home prices that meet the actual value of the home; providing those looking to buy, such as first time home owners, an opportunity to invest in residential property.

Where the economy could get dicey is if and when those homes that have been sold at prices above their actual value begin to saturate the auctions at a loss, and those who own these homes try to sell. Buyers will not be willing to pay the inflated prices that the owners will need to seek to get out of their now higher than and the sellers will either be forced to sell at a loss, or remain in the home.

Other countries such as the U.S. and the U.K. have also seen this bubble bust.  Those communities that will feel the effects of this peak are the larger cities like Sydney, Melbourne, Perth, Brisbane, Darwin, Canberra, Adelaide, and Hobart since they were the areas who saw the greatest climbs in median home prices over the past four years.

With home prices dropping and residential interest rates dropping some might think that it would go hand in hand with commercial real estate. However, this is not the case. Industrial, retail and office properties are seeing a 6 percent return and continuing to climb.

Where banks used to be the monopoly on commercial property loans, there are now non-bank lending options that offer lower interest rates, more flexible terms and lenders who are willing to negotiate to get your business. This has created a more buyer friendly situation for those interested in investing in commercial property.

For those who own their business purchasing commercial property instead of leasing a space could have multiple benefits:

  • Rent – Depending on the size of the business and the size of the property, there is the potential for rental income by renting space to other businesses that may not be large enough or the cost benefits may not be great enough for them to purchase their own facility. By renting out the extra space a business can help off-set a portion of their loan payments and possibly provide an added income if the incoming rent is more than the loan payments.
  • Equity – As with any real estate investment, over time equity builds as the loan is paid down and property values increase.
  • Tax Breaks–Although basis materials and operating expenses can only be claimed in the year they were incurred, purchasing a facility is a deduction that is spread out over an extended period of time, making buying commercial property a continuing tax deduction for the business owner who owns their own facility.

For those who are simply looking to buy commercial property as an investment and have no intention of inhabiting the space themselves, there are some things to consider:

  • What type of space is the property? – Different spaces will attract different types of businesses. A family restaurant will have different needs than a warehouse club or grocery store, just as a retail space will need more public curb appeal than a warehousing space will. These differences will affect the marketability of the property when looking for a tenant.
  • Who are the current tenants? – If the space has tenants, look at their history in the space to find out things like their payment patters, i.e. pays rent on time, requires lots of personalized attention, etc. Also, it is important to know if they are a large company or a small mom and pop type organization in order to have a better since of their stability and the likelihood of them remaining a tenant for the long term. The type of industry they are could also affect the draw for other types of businesses into other units within the property and some industries will have more consumers than others. An example would be that a child care facility will probably not want to be rent a space directly next door to a liquor store.
  • How many units are currently leased? –If the considered property has multiple units, it is important to know how many are leased and what types of leases the current tenants have. This will affect how many units need to find renters and what the overall income capability is, since current tenants will be locked into their lease rate for the duration of their lease.
  • What length lease due any current tenants have? – This was touched on slightly in the bullet point above. Knowing the longevity of the current tenants lease will provide an idea of how long the space will be filled before having to either re-negotiate a new lease, or locate new tenants which can take a while depending on the space to find a new tenant, and the investor will have to have the funds to cover the loan payments while the space sits empty.
  • What are current and projected consumer trends? – Look at where consumer trends are leading. Business trends are cyclical and change with time. So you do not want to be trapped into a large open space retail location if the trends are steering towards small specialty shops. It will take a lot longer to fill the space if the space becomes empty.
  • Is this to be a long-term investment? – In general commercial property is more difficult to sell than residential property taking as long as 6 months to find a buyer in some cases. Commercial property investments should be considered a long-term investment.
  • How much renovation does the property need? – If the property is sitting empty there may be a lot of renovation expense to get the facility rentable. If there are currently tenants are they happy with the condition of the building and facilities, or will there be renovation expenses involved in order to get a lease renewal?

Once the decision to invest in commercial property has been made, it is paramount to find a reputable broker or agent to find and negotiate the best deal. A reputable broker or agent should be able to answer all the questions above or know where to find the answers. They will take the time to understand what the investor is looking for and provide them with options that fit both the buyer’s objectives and their financial abilities. Once a property has been chosen the broker or agent should have the resources to finalize the sale.

The Australian housing market may be on the declining stabilizing turn and interest rates beginning to rise, but they are a completely different animal from the commercial property world. Commercial properties are a quality long-term investment for those who know what they are looking for, have the capital to survive long periods of time without a tenant, and know what questions to ask.

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