PROPERTIES YOU SHOULDN’T BUY - Unikorn Commercial Property (1)

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PROPERTIES YOU SHOULDNT BUY There are certain
properties that you should not buy in this
current market. Each market will behave
differently in each state and territory across
Australia and there are certainly some types of
properties you should be avoiding. One option
that most people think should be avoided is
office space, but actually they are
wrong. Depending on your risk profile (which we
conduct when we bring you on as a client in our
buyers agency service), most people think
office spaces are to be avoided followed by
retail. But in fact, it is where others are not
buying that you should be buying. The reason for
that is swings and round- abouts We have seen
areas that go down in the residential market.
Weve seen areas thats come up in the
residential market. Weve seen apartments have
their run of good fortune. We have seen large
rural places having a run weve seen the people
wanting to move regional and weve seen them
coming back in the city. Weve seen the spiral of
granny flats, weve seen extensions, weve seen
big mega mansions and a downsize. All markets
fluctuate. So, we have seen people who move
from residential to commercial. Weve seen them
run to petrol stations, childcare centres,
purchasing franchises like KFC or McDonalds (big
brand tenants) and then weve seen the types of
strip mall shops that have become popular at the
moment. Multi tenancy options create a degree of
security and people are paying a premium for
warehouse space because they think they are
secure. But we know of warehouse spaces out there
that are vacant for 12 months and they cant
find a tenant. Even though the papers tell you
that there is a 1 vacancy rate in warehousing,
it is a particular type of warehouse in that
particular area that theyre trying to get into.
Now, if you bought something with a large
warehouse tenant in there, like a large logistics
company (similar to an Amazon, Pet Barn, etc),
and they happen to vacate, theres going to be a
lot of capital costs for you to repurpose that
property. We are big believers that you should
be buying something where other people are not.
So right now, what not to buy is an over
inflated, lower yielding warehouse property that
is in either Queensland or regional Queensland.
For example, any property that is in the Brisbane
area, that39s less than five and a half
percent probably shouldnt be bought. This view
is controversial because there will be a push for
people to sell you that type of property, but
the reason we suggest you dont buy is because,
if the market corrects itself, then youre going
to have loss of equity. At five and a half
percent you might as well buy back
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in Melbourne, back into regional New South Wales
or go to South Australia or the ACT because what
youll find there are better returns. The other
option is going regional and paying metro prices.
So, what were seeing are in areas like
Townsville and Rockhampton (in regional
Queensland), were seeing Rockhampton, at your 7
mark. A recent warehouse sale in Townsville was
a 6.3 and you would be leaving yourself wide
open to lose your equity. Thats the type of
property to avoid. Yes, it might be on a
four-year lease. Yes, the tenant seems very
secure. But the thing is you are paying
essentially Brisbane fringe returns for regional
property. If the compression happens, if the
market repairs itself, and the area goes back to
a seven or seven and a half percent yield,
youve lost equity in that deal. And it39s
going to take you years to recover. Remember,
regional properties can be flat for a much longer
period. They dont have the ups and downs that
you have in metro areas. In metro areas if you
bought in at a higher price, you just have to
wait until the market goes up, then you might
want to refinance or sell and buy at a time when
the market corrects itself a bit. You dont get
that in regional. The market itself could be flat
for up to 10 years and as a first-time property
investor, the risk right now of buying in
regional at an incorrect yield has never been
higher than before. So, if someone is showing
you something that is at a much, much lower yield
in comparison to what it was one or two years
ago, or six months ago, then youve got to ask
why? If the difference between that yield and
a metro yield is only 1 then come back to metro.
For example, if you were buying a commercial
property in the Townsville area, with a warehouse
on a four year lease, no brand name tenant, a
secure Mum Dad at a million dollars at 6.3
yield, you could buy the same tenant, the same
type of property back in Brisbane, at probably
5.75 towards 6, you have paid too much for
that property. No matter what people have told
you, you have paid too much for that
property. If you bought the same warehouse right
now for just 7 it would still be good buy. You
will still have protected yourself because
there39s still a good 1 to 1.25 margin
between you and metro area. People currently
dont want to buy office space they dont want
to buy retail. But this is the best time to
capitalise on those yields. Because you could get
5.5 6 in Melbourne. Why wouldnt you consider
an office space in Adelaide? Or in the ACT? You
could get 5 in Sydney Metro. Why wouldnt you
get that even though its an office space? Yes,
there is some risk but with risk comes reward.
The same with retail because by the time we get
through the pandemic, no matter whether we have
another wave or whatever it is, we are going to
live and find ways to get through it. Yes, the
way that we work has changed significantly. Were
not accessing offices as much as before, but they
are coming back to normal office working
environments.
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At the end of next year, well be almost
recovered to probably your 90-95 level and in
two years time people would have forgotten there
was a pandemic. Just like in a very short space
of time, in about three to five years, we forgot
there was a global financial crisis. In 10
years time, we will probably be due for the next
one! But we would have forgotten about the
current commercial property climate and the
office space will be back where it was. If you
bought in now, you would have years to reap the
rewards. Its positive cash flow. If you want to
work with Helen Tarrants Unikorn Commercial
Property, we are going to steer you in the right
direction and help you choose what to buy (and
what NOT to buy!), depending on what the current
market is doing. Do not be led by the market. Do
not believe in a sheep mentality. Dont be duped
by marketing hype and sales talk! Believe that
youve got to go counterintuitive to the market
to get ahead of the market. If you dont, then
you are going to lose out when the market
corrects itself. Reach out to Helentarrant.com
or Helen_at_commercialpropertycashflow.com.au