Many commercial property investors will often fail to optimise their portfolios by overlooking some very basic asset management fundamentals. So what are some of the key areas that can help boost returns from commercial property and why are these often missed by do-it-yourself investors?
Anyone with the financial capacity can become a commercial property investor, but few have the expertise or the time to adequately manage their assets, let alone find a commercial property that will deliver superior returns.
Even with the assistance of a property manager, the onus can often fall on the DIY investor to ensure returns are optimised.
In part 1 of this 2-part article, we examine four ways to optimise commercial property assets to deliver higher returns to investors.
Most investors will gear their commercial property to assist in purchasing an asset or to boost returns in low-interest environments.
Whether fixed debt or variable, rates are for limited periods and it falls on the owner to be aware of renewal dates and to secure the best rate for the next period.
The closer you are to the market the better chance you have at optimising your debt structures by deciding when to fix or when to remain on a variable rate.
Property funds generally achieve a better rate than the DIY investor simply because of the economies of scale (as funds can borrow more to buy larger assets) as well as access to commercial industry rates.
Additionally, the loans in property funds are generally unsecured so there is no exposure to the individuals within the trust, whereas the DIY investor will have to provide security over the asset, and possibly other assets in addition.
2. Statutory costs
For land tax, council rates and other statutory costs there is an underlying property valuation.
It is not uncommon for professional property managers to have never challenged the underlying valuations and, dependent on the property management contract, it may not be a requirement for them to do so.
However, if the values aren’t tested and challenged, the DIY investor could well be paying more than necessary for statutory payments on their commercial property.
This isn’t uncommon. Typically, the relevant state body responsible for commercial property valuations will simply apply a rate dependent on the square meterage of the asset as well as the asset type.
This is, however, often too simplistic as all commercial properties are different. There may be an easement on the title or a restriction on development that affects the value, for example.
Therefore, it’s up to the DIY investor (or their property manager) to challenge these, and the savings can be significant. Even if the costs are recovered from the tenants through the outgoings, the lower the outgoings to the tenant, the better the share of gross rent to the trust.
In a property fund the manager should be very aware of valuation processes and is able to constantly review the valuation basis and challenge these as applicable.
3. Variable outgoings
For the DIY investor there is generally a reliance on the property manager to control the outgoings and the billings to tenants.
A good property manager should be capable of handling this efficiently. However, has the property manager interpreted the lease correctly to ensure all outgoings are recovered?
Most commercial leases are prescriptive on the recoveries of outgoings and in certain property sectors legislation also dictates what is recoverable; however, often they can be open to interpretation and this needs to be properly considered.
Additionally, has the property manager challenged the cost of the service providers and have you benefited from reduced rates from the size of the portfolio they manage?
A DIY investor really needs to be challenging their property manager on all these items, but again this takes time and an understanding of what needs to be challenged.
Property funds are dealing with these issues every day and continually identify areas of inefficiency and errors on recovering costs.
4. Options and renewals
In a tenant’s market, who is ensuring the tenant is happy enough to want to renew their tenancy or serve their option?
When approaching a lease expiry, it’s prudent in a tenant’s market to ensure that repairs and issues are resolved more speedily and efficient than ever in order not to detract from the property.
Additionally, in a competitive market, agents and other owners could well be speaking with your tenants offering alternative premises particularly if they are aware a lease expiry is approaching.
It’s prudent to be on the front foot and make contact 12-18 months prior to an option or lease expiry.
Consider offering them a proposal as it is more than likely they are looking at or have been presented with other options. If they know you are prepared to meet the market, it may go a long way to securing them on renewal.