Commercial property

Commercial property

Retail properties continue to benefit from Self Managed Super Fund investors who see commercial property as a safe place for their money. However, commercial properties in certain areas are feeling the impact of weaker retail conditions. For example, Chapel St, long considered Melbourne’s premier retail shopping strip, has the highest number of premises either vacant or available to lease that I’ve seen in my twenty years in property.

As this newsletter goes to print, nine Chapel St properties were listed for sale and 17 retail spaces were available to lease. Whereas for many years, people bought existing Chapel St businesses just to secure a lease, we’re now seeing many big name, national retailers desperately trying to get out of their lease. For retail businesses, the general rule of thumb is that rents should be no more than 15-20% of turnover, yet many are struggling with rental price hikes that makes their continue tenure unviable. For instance, we’re aware of a property that sold last year with a rental yield of about 4%. The new landlords increased the rent by 30%, which the retail tenant who’d been in the property for ten years couldn’t afford to pay. Consequently the tenant vacated and the landlord has not been able to find new tenants. It can be difficult to find commercial properties that really stack up, even in the current market.

Here is our advice to clients who are considering purchasing retail properties as an investment:

1. Your due diligence process is absolutely critical. How are retailers performing in the commercial area you’re looking at buying into? Is the current rental at market value? Accurate rental appraisal is critical if investors are basing decisions on capital growth returns.

2. Buy a property that has as much frontage as possible in quality retail strip. Look for a property that has uninterrupted showroom frontage, parking and rear access to the premises.

3. Assess the quality of the tenant and the quality of the lease.

4. Don’t forget to factor in the cost of any structural upgrades the property may require into the future.