It’s not just yield that attracts investors to commercial property. It’s the opportunity for strong capital growth. Here’s how to get a better total return from your commercial property investment.
The beauty of providing commercial property syndicates is the surprise on investors’ faces when we tell them we’ve added 30 per cent to their initial investment (or almost doubled it).
That’s right, it’s not just about a cash return. Commercial property is rife with opportunity for capital growth – if you know how to create it. Here are five ways we’ve driven capital growth from decades of commercial property investment.
1. Extend the existing lease
The value of your property is heavily dependant on the lease agreements you have in place with your tenants. If the leases are short, then so too will be your WALE (Weighted Average Lease Expiry). So, you’ll want that WALE as high as possible.
If you have a lease expiry on the way, or you’ve just purchased a property with a relatively short lease, look to negotiate an extension.
Be aware that sometimes this may involve an incentive, like a reduction in rent, a rent-free period or improvements to the property at your cost.
2. Find a better tenant
In the event you can’t extend your tenant’s lease, or maybe you decide you can find a stronger one, upgrade to a better tenant.
National and multinational companies are ideal, particularly if they are ASX-listed.
The larger the business, typically the more secure they are in the long run against any economic downturn. They should have history of solid performance and a positive outlook ahead. Plus, they may have a parent company, like Wesfarmers, Woolworths or a major bank, who can bail them out in the event of closure.
Stronger tenants bode well for the property’s valuation, as valuers will consider the strength of the tenant in their valuation.
3. Increase signage and exposure
When a tenant is better exposed to the cars passing by their store or the foot traffic streaming passed their office, there is a likelihood of better business performance.
We have retail properties with over 50,000 vehicles passing by each day. By increasing external facades and improving visibility from the road, we’ve managed to help reposition these retail centres as the go-to destination in their area. The results are evident.
4. Get your hands dirty: Add value for your tenants
Listening to your tenants is always a good idea.
That’s especially the case before you buy. Tenants will tell you their gripes with the property and let you know what’s in need of repair or upgrade. This is a great time to get your tenant – your partner in this investment – on-side.
Consider providing them what they need – whether new carpets or an upgraded air conditioning unit – and you could have a friend for the lifetime of your investment.
We’ve recently agreed to build hardstand on an existing tenant’s premises. While the outlay is large, it will provide huge additional return on investment.
5. Invest at 6 o’clock (or in markets with high tenant demand)
A market at its peak is represented at the top of the property clock, namely 12 o’clock. Assets in these markets are likely to be pricey and sometimes only headed one way – down. Not to say they are bad investments (the best investors can be successful in any market), but the opportunities are lower for substantial capital growth.
Instead, it can be smarter to look at commercial properties in a weakened or up-and-coming market.
An obvious signal of a weak market is the vacancy rate. The tenants have control in high vacancy property markets, because their choice for cheap but high-quality premises are abundant. If you can be the one to satisfy them, through listening to them and catering to their needs, then you might secure a strong, long-term tenant. Then you can ride the cycle up to the top of the property clock.
Beyond this, you are likely to find high quality property come cheap in property markets at 6 o’clock. After all, one of the first steps to successful commercial property investment is buying well.
Every commercial property investment has a different opportunity for driving capital growth. Sure, driving it is one thing, but finding a capital growth opportunity is another. If you don’t know where to look, but you want an investment with strong return on your money, invest with the professionals.
For more information on investing alongside experts in a commercial property syndicate, get in touch with us today.