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April 2011

Archives for April 2011

Why Do Some Investors Fail at
Commercial Real Estate Investing?

 

Reason #1: Lack of Research

Doing your homework will ensure Commercial property success Most investors fail to properly research the market and understand the relationship each sector (office, retail & industrial) has with the local economy, nearby competition and the marketplace itself.

Reason #2: Poor Analysis

Many investors fail to thoroughly analyze and research their chosen properties as far as the overall economics, calibre of the tenant and any related risks that may be involved.

Reason #3: Lack of Commitment

Investing in Commercial property requires a reasonable degree of hands-on involvement. Some investors make the mistake of believing they can be absentee landlords. You at least need to be involved at a strategic level.

Reason #4: Over Borrowing

Negative gearing is fine. But you still need to start with sufficient equity, to ensure that your investment is not over-leveraged. Always keep some funds aside for unforeseen issues that may arise.

Reason #5: Lack of Understanding

The ownership of Commercial property needs a basic understanding of things like … tenancy law, building construction, how to add value, recognising market trends and so on. All of these can be very easily addressed.

Reason #6: Price vs Value

Some beginners tend to believe a cheap price means good value and a sound investment. Instead, you need to look behind what is being presented to discover the true underlying value.

Reason #7: Over Estimating Your Skills

To be a really successful Commercial investor, you need to build up a trusted team around you — to provide valuable input in the areas of …

  • Analysis and due-diligence,
  • Negotiating the purchase,
  • Vetting the documentation,
  • Ongoing property management,
  • Determining the time to sell.

Reason #8: Lack of Diversity

After you’ve purchased your first property, you need to widen your perspective — both geographically, and across the various sectors of Commercial property. Never simply have all your eggs one basket.


Asian Thrust will Prove Good for
Australian Commercial Property


Following the global financial crisis, the extent of trade imbalances has eased somewhat between Advanced Western economies and the Emerging Asian economies.

The gap between China’s huge current-account surpluses and America is out-of-control deficits may have temporarily narrowed. But the IMF believes the massive disparity will return, as world economic activity improves.

The ups and downs of exchange rates and capital movements are seen by the US and the Western economies as a method of ensuring a proper allocation of resources.

Whereas, it seems Asian countries view exchange rate movements as an annoying distraction from controlled expansion of their “home” economies. And amassing foreign currencies is seen as the best protection against a re-occurrence of the 1997 Asian financial crisis.

How will this affect Commercial Property Investment?

China’s stated goal of 7% growth over the next five years (plus its dependence upon coal, iron ore, LNG and nickel) will provide enormous economic upside for Australia.

On this basis, China’s contribution to global economic output will rival that of the European Union within five years; and even the US, within the next 10 years.

While Australia’s mining boom may help to create a “two-speed economy” … the flow-through benefits will be felt by everyone — to a greater or lesser extent.

Clearly, the growing mining (and mining-related) sector will need to be physically accommodated.

Similarly, the support services and businesses like … accountants, lawyers and the merchant bankers … will all need to engage more staff. And that means we’ll need to construct more office buildings to house them.

Bottom Line: Until we do that (which can take between 3 to 5 years), rentals for both CBD and suburban Office space will continue to escalate those capital cities where the vacancy rates currently sit at around 7%, or below.

Therefore, right now, that means you should be looking to snap up something in Melbourne, Sydney or Perth. And then, ride the current growth cycle through to 2018.

 

Office Activity: CBD vs Suburban

Commercial Buildings
In several recent articles, we discussed the growing health of the CBD Office markets around Australia.

Melbourne still leads the other capital cities with a CBD vacancy rate of 6.2% at the end of March.

And according to Savills’ latest Office Spotlight, the number of whole floors within the city of Melbourne has fallen by some 35% — from 60 to 39 available floors, as at January 2011.

It seems that CBD tenants are scrambling to lock in larger areas, to allow for growth and avoid the expected huge rent increases over the next 5 to 7 years.

Office VacanciesAs a result, many mid-sized tenants are being pushed out into suburban locations. In turn, this is causing these vacancies to fall and rentals to rise.

As such, Melbourne’s suburban vacancy rate (at 5.8%) is now below that for the CBD.

And Colliers Research believes this could fall below 4% over the next 12 months — through a shortage of new space coming onto the market.

Likewise, Sydney and Brisbane have seen their suburban vacancy rates also decline. And net prime face rents in North Sydney are now up over $600 per sqm.

It would appear only Adelaide’s suburban Office leasing market has remained soft — despite several major sales putting some downward pressure on yields.

Bottom Line: Fundamentally, all the signs are there for continued growth in Commercial rentals and capital values over the next 5 to 7 years — despite the global backdrop creating hesitation for some investors, who are not part of the “Inner Circle”!


Rates on Hold … For Now!

Inflation Watch
Yesterday, the Reserve Bank left the cash rate unchanged at 4.75%. And these graphs will help to explain their current dilemma.

For the time being, the RBA’s focus is upon “inflation excluding volatile items” — mainly because of the various natural disasters, both here and overseas. [Read more…]