Great wines get better in the cellar, but drinking them too early is a disappointing experience. Here’s how that applies to commercial property investments…
Lucia graduated from our Commercial Property Masterclass and set about looking at commercial property investments. We reviewed dozens of properties on her behalf before the right one came along.
It was just like an award-winning wine in the cellar that has potential but is too young to drink. Much more palatable results can be achieved with a little time and nurturing.
Here’s how a little time and the correct nurturing can turn mediocre commercial property investments into winners.
Read to the end to find the moral of the story 😉
BTW, if you’d like to upskill yourself the way Lucia did, our final Commercial Property Masterclass of the year starts on Monday and runs for 3 consecutive Monday evenings. Email info@newlandburling.com for a fact sheet and to reserve a seat. It will probably be limited to 6 people so you’ll receive lots of personalised tuition not available anywhere else.
The listing
On offer was a 217m2 industrial building with road frontage on a major road in East Tamaki. It was tenanted by a manufacturer of engineered stone benchtops paying $31,961 net p.a. The asking price was $565,000.
The numerically literate will already have calculated the yield at 5.66% – okay but nothing to get excited about.
Due diligence
Lucia used our due diligence clause, which bought her time to analyse the deal and gave her peace of mind that if it didn’t pan out she could walk away without consequence or loss.
During the due diligence process we analysed the lease and found it had 3 years to run, with rent reviews of CPI +2% in July of each year.
We also discovered the roof was in a poor state of repair and needed replacing.
Final negotiations
With our guidance Lucia negotiated a $25k reduction in the price to cover the cost of re-roofing, which was accepted. The property settled in September 2018.
Building works
Lucia waited for summer and carried out the re-roofing project in January 2019 when it would cause minimal disruption to her tenant.
Rent review
In July 2019 we advised the tenant that, as per the rent review clause, the rent would increase by 3.7% to $33,146 p.a. That brought the yield up to 5.9%.
An unexpected loss
The tenant’s business was growing and they wanted to move into larger premises where they could consolidate their manufacturing and showroom into one combined facility. They approached us, as Lucia’s property manager, asking for permission to assign the lease.
Turning loss into opportunity
We agreed to grant the tenant an early release from their lease subject to them covering the loss of rent while we found a new tenant plus the leasing costs and any incentives required.
A new tenant
The advertising campaign turned up an East Tamaki business wanting to relocate to a better location within East Tamaki.
Some would call the business a gym, but that’s underselling it. In reality it’s a very specialised, niche business offering powerlifting, strongman and personal training for athletes competing in strength sports. Most of their impressive equipment is custom made, and the rest is imported to ensure it is fit for purpose.
The coaches are successful international and national competitors themselves, holding multiple records in different events.
A new fit-out
The new tenant agreed to demolish the tired old offices, upgrade the warehouse space, and completely renovate the kitchenette and toilet amenities.
A new lease
A new 4-year lease commenced on 1 September 2019 and includes two 3-year rights of renewal, market rent reviews every two years, a hard ratchet, and initial rent of $34,000 p.a. That brought the yield up to 6.02%.
The moral of the story
Within 12 months, an industrial investment property bought at a 5.66% yield is now returning 6.02%. Sometimes it pays not to be too greedy on your initial expectations.
Those who stick resolutely to their guns refusing to buy anything for less than 6% yield will miss out on many deals that could give them exactly what they want within a very short period of time.
Reign in the greed and reap the rewards!
The second lesson is that great deals still exist. You just need to know what to look for and be prepared to put in the work. If you do our Commercial Property Masterclass you’ll be well equipped!
Lucia’s email
In September Lucia sent this email to Jack and Laura…
Good morning Jack & Laura,
Just wanted to say once again thank-you so much for your help over the past couple of weeks in getting the Agreement to Lease finalised.
Jack I especially note your attention to detail and making sure I get the best deal possible and my back is covered. Laura your quick responses and positive outcomes liaising with B/Corp, tenant etc behind the scenes. Both of you have been outstanding.
Needless to say I am very pleased with the outcome and glad it will benefit me. I think the two of you make a great team!
Best regards
Lucia
Upskill yourself
If you’d like to upskill yourself the way Lucia did, our final Commercial Property Masterclass of the year starts on Monday and runs for 3 consecutive Monday evenings. Email info@newlandburling.com for a fact sheet and to reserve a seat. The price is extremely reasonable and it will probably be limited to 6 people so you’ll receive lots of personalised tuition not available anywhere else. More info here »
Photo by Pixabay from Pexels
* We have used the name Lucia as a nom de plume to protect the privacy of our client. All other details are 100% accurate.
