Before investing in commercial property, an understanding of yields is crucial.
While initial net yield is typically provided in commercial property reports, investors should be wary of relying on this simplified figure alone. Instead, information on the analysed market yield should also be sought, most likely from a specialist commercial real estate agent, as well as confirmation on whether a net or gross yield has been reported.
Any yield that’s reported for the property will usually be the initial yield of the investment, which is purely the income divided by the sales price, but really, it’s the net yield you’re interested in. A property could be marketed at a yield of eight per cent gross, when net yield is in fact six per cent.
While the distinction between net and gross yield is fairly easy to determine, analysed market yield is more involved and requires information that the average purchaser is not privy to.
Analysed market yield considers the actual market rent because, in the commercial marketplace, any introduction of a qualified tenant will usually involve some form of incentive. But when a property is assessed, the analysis does not, and generally cannot, take into account incentives that the landlord has offered outside of the lease deal.
For example, a property’s current rental income could be inflated because the owner provided a $150,000 fit-out when the tenant moved in. However, a market review scheduled in the next three years could correct this and bring the rent down to the actual market price. A new owner, unaware of this deal at the time of purchase, would then see his investment negatively impacted when the market correction occurs.
While leases of three or more years are registered and available for download from the Land Registry Service at a cost, incentives are not typically recorded in the lease. Additionally, while purchasers may engage a valuer to determine the market rent of a property, the valuer will also be unaware of any incentives that fall outside of the registered lease, unless they speak to the agent who brokered the deal, or a local commercial expert who is in tune with the market.
This is why consulting a commercial real estate agent – as they have access to the relevant non-documented information – is critical to understanding the analysed market yield of a property
and ensuring the best analysis is available before you make an investment.
As with any investment, doing your research beforehand is critical. For commercial real estate this means understanding yields. Without this information, uninformed buyers could find themselves out of pocket, in possession of a plummeting investment, and at risk of default.
Of course, yield is irrelevant if there’s no security of tenure. If the tenant’s not financially sound and the property is likely to become vacant, then the yield is of little importance. So, you need to undertake your due diligence on both the market and the tenant.
Contact Patrick for all your commercial property queries, on 9977 6555 and learn more at www.pineproperty.com.au
