Commercial Property Investment Tips
Achieving success in commercial property investment has become more challenging amid rising interest rates, economic slowdowns, and persistent uncertainties.
The days of effortless gains in this sector are gone, necessitating a higher level of awareness and discernment from investors. While conventional metrics like capitalization rates and financial forecasts offer valuable insights, engaging with tenants is crucial for a more comprehensive understanding. These conversations can unveil hidden information, such as tenant struggles or impending departures, as well as potential maintenance issues. Any hesitance from sellers to provide tenant access should prompt careful consideration by investors.
Caution is crucial for investors in the current market, especially regarding capitalization rates (cap rates). Determining optimal asset prices is challenging due to fluctuating cap rates, as seen in transaction reports. While cap rates were stable at 4% to 5% in a low-interest-rate environment, the current rates of 5% to 7% make them appear unsustainable. Investors should anticipate a rise in cap rates, assessing if there's enough rental growth to support property valuations and approaching decisions with prudence.
Before entering commercial property decisions, investors must secure funding and understand bank lending dynamics. Recent shifts signal a cautious lending landscape with banks being discerning, withdrawing from certain transactions or imposing higher rates and interest cover requirements. Assuming predetermined rates or guaranteed bank funding is risky amid significant rate hikes impacting asset serviceability. Additionally, land tax has substantially increased over the past five years, particularly in Victoria.
Before investing, a thorough understanding of the target asset class is crucial due to significant performance variations. Different sectors have distinct benchmarks, cap rates, and supply-demand dynamics, each with unique growth and outlook profiles. Notably, sectors like build-to-rent offer tax incentives, while aged care faces increased regulation post a royal commission, impacting both accommodation quality and returns. Location-specific factors, such as new infrastructure development, significantly influence property values.
Having a strategic plan is imperative in the current commercial property market, where relying on a passive approach may no longer be effective. Rather than adopting a wait-and-see stance, investors should meticulously outline their objectives when acquiring a property. Whether the goal is rental income, short-term capital growth with an exit plan, or seizing a development or value-add opportunity, the feasibility of these aspirations needs careful evaluation. It is essential to scrutinize assumptions regarding rental yields and terminal cap rates to ensure their realism and alignment with the overall investment strategy.
Source: https://www.afr.com/policy/economy/australia-s-big-build-spills-over-into-inflation-20231101-p5egnt