Commercial Property Investment – Business Premises

Its not uncommon for our clients to ask our opinion on their property investment plans – especially when they are considering a commercial property.

‘What do you think of this property?’ ‘Is this a good return?’ What kind of loan can we get?’

This is always hard to answer as there are so many variables that go into the decision and as brokers. our advice is limited to the debt, not the investment decisions.
What we do focus on is making sure our clients have considered various possibilities and then get expert advice if they need it.

We can’t deny that we love property in this country and the last 18+ months is a testament to that, with residential property values showing strong results throughout the most volatile and unpredictable market situation we have seen.

Commercial property, however, has been a little different and showing varied results across different segments. What we have not seen yet, as was originally expected by many (myself included) is a big decline in commercial property values.
What will happen in 2022?

What we do know is that investing in commercial property, as opposed to residential property, is quite different and involves many other factors which need to be considered. This is also the case when you are seeking finance to assist with your new acquisition as the lender will require much more information around the property – such as:

• The quality of the tenant. This aspect is paramount. Do they have a solid business that will be there for the medium to long term?
• How long is the lease term? This is important to secure your cashflow and if you need finance. Longer terms or leases with good extension terms are preferred by lenders.
• Is it a single or multi-tenant property? i.e., multiple levels and different tenants vs sole tenant
• The cost of outgoings can be far more significant – are these going to be paid by the property owner or passed on to the tenant?
• The ‘letting up’ period is usually much longer than it is in residential property.
• Is it specialised or purpose built for a specific target market vs non-specialised property for multiple users?
• Is it being purchased as a going concern or not? This will have GST implications so be aware what applies to you.
• Right now, is it industrial as opposed to retail? There’s a significant difference in these property sectors and therefore all lenders will prefer one over the other.

The above items can have a significant impact on a commercial investment. However, there is another scenario when a business owner is looking to buy their business premises – and this brings a vastly different element to both the purchase decision and the loan process.

In this scenario, some of the above items become redundant or less important to the overall transaction. For example, the quality of tenant or length of the lease as the borrower and tenant are one in the same. The obvious advantage of buying your business premises is that you can redirect your rental expense towards paying off any loan required to acquire the property or just invest this money back into the business.

Buying your premises has pros and cons; it provides certainty and comfort for you as a business owner that you can continue trading from premises for the long term and removes the risk of disruption to your business by having to move should the lease expire, the property be redeveloped etc.

On the flip side, it also means you may be tied to the property longer than desired if you happen to outgrow it or if the location becomes less desirable for your business. You do, however, have the option as the landlord & business owner to relocate your business and find a new tenant to occupy the property, so not all is lost in that instance.

In recent times, we have seen an increased interest from business owners looking to buy their trading premises and there appears to be a few key reasons that are driving these decisions:

• All time low interest rates that often see the loan repayments (especially interest only) lower than the rental expense.
• Need for stability and security knowing their business has a long-term home without the risk of the landlord selling up or redeveloping the property. This disruption can be costly and slow down the operations of the business.
• Lack of comparable stock or other suitable stock to meet their business needs.
• Sound investment option compared with other alternatives.
• Business owners looking to use their super money to purchase property via a self-managed super fund as part of an investment strategy.

The current lending environment is also supportive of business owners looking to secure their business premises with lenders  actively trying to attract these clients by offering better loan terms which now include up to 30-year loans (typically max loans up to 20 years) and LVR’s on commercial property up to 80% stand-alone (previously 65%, maybe 70%).
Usually a guarantee from your trading business will be required as additional comfort to obtain the longer terms and higher LVR’s.

In these scenarios, the lenders will also want to delve into your business to understand how it has performed in recent years to ensure it can continue to make the necessary lease repayments which are effectively being used to repay the loan obtained for the purchase.

Should you need guidance or assistance with your commercial property finance requirements, contact the Duo Finance team.