Not all buyer’s agents are experienced with purchasing commercial property. When choosing an agent to help you buy a commercial property, make sure you ask for examples of properties they have acted on. If you are considering buying a 12 storey office building in Sydney CBD or anywhere else for that matter, then make sure your buyer’s agent is experienced in these type of transaction.
Commercial property ranges hugely from $500,000 retail spaces or strata office suites, to well over $50m+ for freehold office buildings and large scale retail. Valuing a commercial property can be a complicated process and requires thorough due diligence.
The property may have multiple tenants who all have different lease terms. An experienced buyer’s agent will:
- review all leases to see what increases are built in, the length of the lease and the Weighted Average Leasing Expiry (WALE), what options are there, what is the rental review mechanism at exercise;
- analyse the current rents being received. Are spaces under-rented and is there the opportunity to increase rents at the expiry of leases? Or are they over-rented and at the expiry of the lease you will not be able to achieve that level of rental again;
- review lease expiries so you know the risk of spaces becoming empty at the end of tenancies;
- review outgoings. What tenants pay for which outgoings and how much is the owner of the building liable for?
- review the building. Are there capital works needed? If so, then what works are required, when are they needed, how much will they cost and what impact in the short term that may have to the occupants?
- Look at the tenant mix. Is there an anchor tenant? Is there a risk the businesses will go out of business?
- Are the tenants paying their rent or are any in arrears?
- Review the zoning for the property. Is there the potential for the property to be redeveloped, and is this in line with the client’s requirements?
There are various ways commercial property is valued. The first thing investors look for is what income the asset will generate – or the yield. Do you know what yield different types of property in different locations will generate? Your buyer’s agent should be able to talk through types of asset, the advantages of them, the yield they generate.
Alternatively, the asset could be a capital play, meaning that you want to purchase a property in a location where you believe the underlying capital value will increase over a set number of years.
The purchaser could be a developer in which case they may not be concerned with the yield, but instead focused on zoning, height limit and FSR of the land. What could they build on the land?
Any buyer’s agent you speak to about representing you on a commercial investment should be experienced with all types of commercial property and have performed due diligence on assets before.