Successful investors realise there’s no crystal ball to help them identify with certainty the ‘next big thing’.
Wouldn’t it be great if we could jump in a time machine, leap forward five or 10 years, and know for certain whether a particular commercial asset type will make a good investment?
Unfortunately, without magic or futuristic technology at our disposal, we have to do our investment due diligence the old-fashioned way – using a deep understanding of the market, years of experience and expert interpretation of industry trends.
Here’s how to identify some of those trends in commercial property.
Look at the supply in the marketplace
It’s simple economics, but you need to check out the supply of various kinds of commercial properties in the marketplace.
Too many similar properties on the market, and not enough demand, and you might be setting yourself up for failure. Look for areas where demand will continue to outstrip supply. Typically, this situation prevails with properties regarded as “well-located”.
Well-located properties should always be attractive to tenants. As an investor, the questions you should always ask yourself before making any acquisition are:
- What will happen if I lose a tenant?
- How quickly can I fill a vacancy?
- How can I maintain or enhance the value of this property?
Demand goes hand in hand with success
Investors need to appreciate the demand drivers for commercial property. There are some fundamentals that almost never change. For example, the Central Business District is the fundamental office location in any capital city. And shopping centre tenants want to ensure their products are aligned to the demographics of the surrounding population.
Imagine there are 180 different office buildings available right now and you’re trying to find a tenant in your own office space. That’s a tough market because you’ve got a lot of competition. But if you’ve got a limited amount of supply and high demand, leasing up space naturally becomes far easier for landlords.
What’s in the pipeline?
Next you need to look at the potential future supply of space into a market. Ask yourself ‘are there any major sites/development projects in the pipeline?’
Bear in mind there is no such thing as a crystal ball, however.
For example, a few years ago the prevailing logic about Sydney was that over 600,000 square metres coming online with the Barangaroo development would supply too much office space, with not enough demand. And so, development and investment stopped. But those assumptions turned out to be very wrong. Supply was absorbed within a year. The result? Demand for space in Barangaroo is being fuelled by the reduction in the supply pipeline.
What have local governments got planned?
The supply pipeline for commercial property is also influenced directly by the decisions of the planning authorities (both State and Local Governments). After all, the planning scheme controls what can be done with land in any location.
In Perth’s beachside suburb Scarborough, the State Government and City of Stirling’s $100 million beachfront redevelopment has recently been completed. Businesses are now enjoying the fruits of a reborn coastal suburb, however there are many local traders which didn’t survive the development phase. The long construction process sunk six businesses in one year with 30 to 40 per cent drop offs in trade.
While it’s important to anticipate the disruption during these works, the upside must be considered too.
Perhaps it’s a good time to seek out investment opportunities. If a tenant can survive a year or two of an ugly construction period, they may thrive in the years after completion.
Sometimes, government policy is specifically aimed at smoothing out property cycle peaks and troughs. But occasionally these can have the opposite effect and ultimately are simply another element thrown in the melting pot of market drivers.
Know your own appetite for risk
So far, we’ve looked at external factors that might impact your willingness to invest in a particular property. But there are internal criteria to consider as well.
Every investor has their own appetite for risk. You need to develop your own criteria and, once you’ve established this, you will be able to identify the kind of properties you’re willing to invest in – and disqualify the ones you’re not.
A big factor here is yield or return. A major consideration might be the security of the lease. Some investors want to add value, others just want to sit on their investment and comfortably earn money.
Certain properties will be approached differently according to the appetite of certain investors.
Consider investing with a syndicator instead
As commercial property syndicators, Properties & Pathways are experts in understanding industry trends. Our investments are managed according to tenant requirements. When you make the tenant happy, you create a stable investment. After all, a property with a quality long-term occupant will be as profitable as possible for investors.
If you’d like to know more about investing alongside us in our commercial property syndicates, get in touch.