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Of three main types of commercial property, offices offer the lowest yield. Over the past 30 years, offices have averaged a 7 per cent return but currently are returning 6 per cent, according to Jones Lang LaSalle, AMP Capital Investors.
One of the reasons office property offers a relatively low yield is that it is seen as a safer investment than retail or industrial. Office tenants tend to stay in their premises longer generally than owners of a retail business, therefore offering greater security to investors.
If you are considering purchasing office property, keep the following attributes in mind:
Attractive appearance – Businesses like to be in aesthetically appealing buildings. This includes the external appearance as well as internal look of the building. The tenant is often responsible for the internal cosmetic appearance (for example, paint and carpets) but landlords need to ensure that the building appears modern.
Aesthetic entry – As many homes strive for the ‘WOW’ factor in the kitchen or yard, the entry to the office building is where you should be concentrating your efforts. This attracts tenants in the first instance and also puts clients of your tenants in a good frame of mind as soon as they walk through the doors.
Natural light – The workers in the office building will spend most of their working day indoors. The opportunity to look at a view and have natural light streaming into their space is of high demand.
Proximity to other offices – Offices tend to do business with other offices. It is no coincidence that lawyers’ offices are grouped together, usually near the court precinct, and banks are grouped in the heart of the CBD. If you are looking to buy an office building, it is safer to buy one in a sought after location.
Since 1980, retail property has returned an average of 9 per cent but currently is returning just above 6 per cent, according to Jones Lang LaSalle, AMP Capital Investors.
Location is crucial to retail property. It must be easily accessible and convenient for shoppers to get to. The corner store is fast becoming extinct as the petrol stations and convenience stores offer more than just milk, bread and the newspaper. Strip shopping, where there is a row of shops on a main road, has seen a decline in recent years but there are some strips which perform particularly well. Bridge Rd, Richmond (Vic), Jetty Rd, Glenelg (SA), King St, Newtown (NSW) and Hastings St, Noosa (QLD) are just a few of the prime shopping strips in Australia. The rents are relatively high in these areas, as is the purchase price.
It is the regional shopping centre which is fast becoming very popular as they are becoming lifestyle centres rather than just a place to get groceries. The opportunity to go to the movies, bowling, have a coffee, meal or even massage, as well as do your shopping is very appealing.
If you are interested in buying space in a suburban shopping centre, the anchor tenant is the key to the success of the centre. The anchor tenant is the one that occupies the largest space; this is often the supermarket. The supermarket is the main reason people will go the centre. The closer your shop is to the supermarket and the more pedestrian traffic you get past the door, the better the business will perform and therefore keep the tenant happy.
Industrial property is the most volatile with regards to returns. During the 1990s recession, the yields were as high as 12 per cent but over the past six years, yields have been falling and are currently around 7 per cent. The reason industrial property returns are relatively high is that they come with a greater vacancy risk.
Factories can be vacant for years, waiting for the economy to improve and, more importantly, the appropriate tenant. Factories are often constructed for a specific reason. This could range from building timber furniture, manufacturing of mattresses or assembling car parts. If the timber manufacturer goes broke or moves, it could be a while before you find another timber manufacturer or business that could use the purpose-built premises.
On the other hand, it is not too difficult to convert a shop that originally sold women’s clothes to one which will be selling mobile telephones. Or convert a Greek restaurant to an Italian restaurant. So far as offices are concerned, a relatively simple refit and refurbishment makes them ready for a variety of business looking for office space to rent.
If you want to buy industrial property, it should be easily accessible to trucks and semi-trailers (close to or on a main road). The roof of the building needs to be high enough to allow forklifts and trucks to pass under and doors/gates also need to be wide enough to offer access to large machinery. There should be staff amenities, such as toilets, small kitchen, and some space which can be used as an office.
No matter which form of commercial property you are buying always read the lease carefully.