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What to include in a commercial property investment strategy

11 June, 2019
Categories: Commercial, Investments

If you’ve spent enough time getting your investment strategy in its best shape, the rest of your job will be easier.

“Give me six hours to chop down a tree and I will spend the first four sharpening the axe.” Commercial property investment needs a tool similar to Abe Lincoln’s. A dull axe might mean challenges in the future but a sharp one will have you swinging at solid returns. For us, that tool is an investment strategy.

If honed correctly, an investment strategy could be the tool to your commercial property success. Here are some items to consider in the short- and long-term:

Short-term investment strategy

When a property has piqued your interest it’s likely you would’ve already discovered its flaws and opportunities.

These are the factors you can capitalise on in the first 18 months of your investment strategy:

1. Establish strong tenant relationships

To get the most value from a commercial property investment you should turn your attention to its tenants.

Build rapport by listening to your tenants. Establish their needs and their existing gripes with the property (if any) and work on solutions within your budget and ability. Understand their business and what matters most to them. It might mean better signage and exposure, or new furnishings.

Strong relationships also make for easier negotiations. When each party respects the other’s need to secure a profitable outcome, they can work together to get the most from the property value.

Establishing strong relationships with your tenants is an ongoing part of your strategy, and one which most successful landlords will focus on.

2. Monitor expiring lease agreements

Know when your leases agreements will end and plan accordingly (as we show below).

3. Renew those lease agreements (or not)

If in the first several months of your investment you have a tenancy agreement up for renewal, prioritise time to discuss it with the tenant.

Find out if they intend to extend their current lease tenure, and ensure you understand the market-related rates before entering negotiations.

If they want reduced rent, ensure there’s evidence to suggest market rents have reduced in line with their proposed amount. Otherwise, you might push for a longer term on their new lease.

Or you might not wish to extend their lease at all. You might want a stronger tenant.

If re-leasing the premises, position the property in the market via a target leasing campaign. Allow for a significant vacancy period if that’s the case, as well as a potential leasing incentive within your reserve fund.

You need to adequately cater for any lease downtime if you’re:

a) looking for a stronger replacement tenant, or

b) filling a hole left by a vacating tenant. This will allow you to continue receiving a solid return.

4. Implement a maintenance program

For a commercial property investment strategy to work, you’ll need a great property manager.

The property manager will need to manage the property diligently and ensure its condition is maintained. This will prolong the useful life of the asset.

Cater for this maintenance in your reserve fund. Because it will be ongoing.

5. Rent collection

Making sure rent is paid seems like a trivial activity. But without a plan to collect rent, you might lose income. Ask yourself…

How are you recording rental payments?

Who is collecting from the tenant?

Are you catering for annual rent increases and reviews, and do you know the annual review dates?

Long-term investment strategy

As with the short-term, your long-term investment strategy will rely on what you uncover during your due diligence period. Here’s what you might consider after you’ve held the property for 18 months:

1. Engage tenants before lease expiries

When your lease agreements approach expiry, it’s important to maximise value where you can.

Has the market shown growing demand for properties like yours? If so, leverage any increase of demand to improve the rental platform. This could translate directly into increased return and capital growth.

2. Analyse market conditions

Your investment decisions will be moulded by the state of the market. Research the market like the experts do, by considering three questions:

  1. Where has the property market been?
  2. Where is the market today?
  3. Where is the market be going?

Before you buy, be aware how the national and state economic climate might look in the future. You will want to envisage an end-date to your investment, but you’ll also want to be flexible should those predictions differ from reality.

3. Consider divestment opportunities

Your investment may have kicked off with a plan to hold the property for four or five years. Maybe ever longer.

But wise investors will have flexible strategies.

They’ll consider opportunities as they arise and be open to diverge from the original plan. This is because the market changes, as does the economy, and so too must your strategy. Especially if an incomparable divestment opportunity arises.

Don’t be pressured into a sale opportunity. But be open to the right one.

4. Understand re-zoning changes

In the years after acquiring your property the surrounding urban environment might evolve. There could be re-zoning and land use changes. To adapt, you’ll need to stay abreast of these.

What does it mean for your property if there is re-zoning? Will you benefit?

For example, we recently purchased an industrial property in Woodridge QLD which is re-zoning from industrial to retail. With big name retailers like Bunnings, BCF and Big W filling space previously occupied by industrial tenants, we have a huge opportunity to enjoy significant value growth. Understanding this re-zoning change was a crucial consideration in our investment strategy for the property.

Every commercial property investment strategy will be different, and many are subject to change. The importance is having one. So, before you take a swing at an investment, sharpen your axe first.

Properties & Pathways is a commercial property investment firm in Australia. Get in touch today to find out how you can invest alongside us.

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