Investors can sometimes be torn between investing directly in a smaller warehouse or jointly in a property fund with power to purchase larger properties.
Each has their own place in a holistic investment strategy, however it’s important to note the advantages and disadvantages of investing in large (more than 1,000sqm) compared to small (less than 1,000sqm) warehouses.
A September 2017 report by Ray White Commercial, ‘Between the Lines – Perth Industrial Sub 5,000sqm leasing market’, has shown vacancy levels across Perth appear much higher in smaller warehouses, with 1,050 vacancies in properties up to 1,000sqm compared to just 342 vacancies in properties 1,000sqm to 15,000sqm. With far more options available to tenants searching for warehouses under 1,000sqm, competition between landlords increases, driving down rental returns.
Freight and transportation
Smaller warehouses tend to be scattered in suburban locations, whereas larger warehouses are typically grouped together near highways, airports and ports, to take advantage of the proximity to freight. Thus, smaller warehouse spaces incur higher transportation costs as a result of the difference in freight proximity.
Building and construction
Larger warehouses are mainly tenant driven; in other words, without demand these warehouses will not be built. Smaller warehouses, on the other hand, can be built without tenant commitments, due to the lower cost of construction.
Larger warehouses also tend to be built to higher standards as sizeable volumes of product storage can require fire sprinklers to meet regulations, or a lift may need to be installed to meet disability requirements. However, smaller warehouses are often built to a lower quality as fire standards are lower (due to size) and tenants are typically not subject to corporate requirements.
Large tenants can often be multi-national firms that are either privately owned or listed on a stock exchange. This provides security of income as the tenant can be extensively researched for debt and payment history. They also generally prefer a longer-term lease of at least five, or sometimes ten years. A smaller tenant, however, can not only be difficult to research, but may be reliant on winning contract work, meaning they cannot secure a warehouse long-term.
Leases and finance security
Leases should be professionally drafted to capture all costs and matters that can occur during the leasing period. This is standard for a larger tenant, but a smaller tenant might be overwhelmed with the level of information required and refuse to pay excessive running costs.
The other security concern is bank guarantees or security deposits. At Westbridge, we prefer a minimum six month bank guarantee across all our properties, however a small company might struggle to have six months of lease payments tied up and prefer only two month guarantees.
Small tenancies require intensive property management. Daily tasks might include attending to roof leaks, repairing damage caused by trucks or even rental arrears. Large tenancies are more likely to have procedures in place to address issues immediately themselves.
With property management also comes asset management, which focuses on the bigger picture such as lease expiries, industry trends and tenant requirements. There is greater difficulty in understanding the tenant requirements of small business as there is a wider variety of business types that can require a small warehouse. It is much easier to predict the future directions of larger organisations. For example, a company may have special building requirements going forward, such as B-double access, which the asset manager would be aware of as an issue when it comes to re-leasing in the future.
Freehold versus strata
Properties with freehold tenure allow asset managers full control of the asset, whereas small warehouses are often part of a strata scheme which can become problematic when issues occur. These may include access disputes or major capital expenditure. Older strata assets are often found in a state of disrepair due to owner disputes, which can discourage tenants and undermine the value of an asset.
In summary, there are reasons an investor might choose a small warehouse as an investment, however investing in larger premises provides greater security and access to better-quality warehouses and tenants. When considering the purchase of a small warehouse, it’s worthwhile for investors to weigh up the option of buying into a larger warehouse, or a fund that has access to these types of properties.