Commercial Yield targets???

[Shane D]

Dear PTers

Could you please explain general yield targets you look for when buying a commercial property in Auckland?

For example, when buying residential, an approx 8% gross yield is a good goal for an Auckland PI.

What about Commercial yields?
- Does industrial or retail have different yield targets?
- Why are commercial yields generally higher than residential? More risk of tenant bankrupty and long vacancies??

Shane D

[Orkibi]

- Does industrial or retail have different yield targets?

Yes, In general Industrial is leading the way with yield, I currently work with a client on a deal with over 9% NET (in commercial it is almost always Net - at list that's what we want)

I hear some retail In Queen street sold for 5.5% -6.5%.

It is all about location and the Tenant / Lease..

[Orkibi]

- Why are commercial yields generally higher than residential? More risk of tenant bankrupty and long vacancies??

They are not always higher, as mention above. But they are mostly NET yield as the tenant pay for OPEX and out goings. and you don't have the Residential tenancy act!!

[Mr_bond]

Part of the reason yields are higher in commercial is that there is a reduced pool of purchasers in relation to houses.

Banks require more equity for commercial, as you say downtime risk in finding a tenant, mum and dad investors don't understand them, etc.

[Davo36]

Shane, this question is like asking "How much should I pay for a house in Auckland?" i.e. it's very open ended.

Yield or cap rate is based around things like:

• Location of property.
  • Exposure to traffic (pedestrian and vehicular).
  • Proximity to motorways
  • Proximity to customers
  • Desirable (or not) location
• Strength of tenant(s).
• Length of leases. And terms in leases such as rent reviews, personal guarantees etc.
• Quality of property in terms of:
  • construction materials. How much maintenance will be needed?
  • things like parking, services (like lifts, air-con etc.)
• Tenant desirability / lettability (is there such a word?) i.e. if your current tenants leave, can you re let it easily or will it be tricky?
• Design of building e.g. warehouses are better to be high stud. Low stud greatly limits your tenant possibilities. Retail shops are better to have wide frontages rather than a long skinny layout with narrow frontage.

And this is just off the top of my head. There are many other factors as well (freehold, stand alone is a bit better than unit title). This list is endless but it's no different to residential.

When you're buying residential you probably weigh up 100 different little intangible things and base your price on that.

[CJ]

Some KFC's just sold at low 5's on a long lease. Some in Newmarket also went in the 5's. From what i understand, it is primarily Asians buying these (I assume because they have access to cheaper finance) as they want good quality buildings.

As well as that book recommended in the other thread, this website (http://www.propbd.co.nz/) is good for current info, especially the auction summaries that he gives.

[Rosco]

All about the tenant

Commercial property is all about the tenant. I've seen tonnes of great commercial property, in great locations sit empty for a long period of time. So while style of building, age, location and other factors are important I would concentrate on the tenant.

Best trick for commercial property is to find empty and buy at a discount due to it being empty. Then before unconditional on purchase, sign up your own business or another tenant. This increases the value significantly. It's quite easy to go from an empty cost base of say 1, to a value once tenanted of 1.5 (ie buy $1 million and worth say $1.5 million).

Really investigate the tenant and think of issues like
- If they move out, who will move in
- How long is their lease for? A right of renewal, does not mean they will renew!
- Are they in an industry that doesn't make sense - ie video rental shop would be a no go as video's are redundant.
- Who is giving you a personal guarantee and what is that guarantee worth?

Generally banks lend for a 10 year term, so that the property is repaid quickly.

I would ideally look for a commercial property with more than 1 tenant, so that if 1 tenant falls over, hopefully the other one stays. Just reduces the risk.

I personally look for a 10% net yield. That way there is lots of surplus if interest rates increase to 9% or higher, and to pay off the mortgage quicker.

I'm not too worried about paying down residential rents once the cashflow is sitting reasonable as you can always get another tenant. But with commercial, I like to pay down the mortgage as quick as possible.

Ross

[Shane D]

Ross,

Some realy good tips above.

Another gentleman in this thread also mentioned the tip of buying empty discount priced commercial and then have a tenant lined up. It seems a great way to add value and equity.

10% net yield target. Now that is a return!!

Shane D

[Davo36]

Yeah you can often add value over time by simply improving the tenants and their leases. This takes time though. So patience is required. It might be 2 years before you can get a rent review, new lease or new tenant etc.