PROPERTIES YOU SHOULDN’T 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 buyer’s 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. We’ve seen areas that’s come up in the residential market.

We’ve seen apartments have their run of good fortune. We have seen large rural places having a run – we’ve seen the people wanting to move regional and we’ve seen them coming back in the city. We’ve seen
the spiral of granny flats, we’ve seen extensions, we’ve seen big mega mansions and a downsize. All markets fluctuate.

So, we have seen people who move from residential to commercial. We’ve seen them run to petrol stations, childcare centres, purchasing franchises like KFC or McDonald’s (big brand tenants) and then we’ve 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 can’t 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 they’re 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, there’s 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, that's less than five and a half percent probably shouldn’t 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 don’t buy is because, if the market corrects itself, then you’re going to have loss of equity. At five and a half percent you might as well buy back in Melbourne, back into regional New South Wales or go to South Australia or the ACT because what you’ll find there are better returns.

The other option is going regional and paying metro prices. So, what we’re seeing are in areas like Townsville and Rockhampton (in regional Queensland), we’re 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. That’s 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, you’ve lost equity in that deal. And it's going to take you years to recover. Remember, regional properties can be flat for a much longer period. They don’t 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 don’t 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 you’ve 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 there's still a good 1 to 1.25% margin between you and metro area. People currently don’t want to buy office space; they don’t 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 wouldn’t you consider an office space in Adelaide? Or in the ACT? You could get 5% in Sydney Metro. Why wouldn’t you get that even though it’s 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. We’re not accessing offices as much as before, but they are coming back to normal office working environments.

At the end of next year, we’ll 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. It’s positive cash flow. If you want to work with Helen Tarrant’s
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. Don’t be duped by marketing hype and sales talk! Believe that you’ve got to go counterintuitive to the market to get ahead of the market. If you don’t, then you are going to lose out when the market corrects itself. Reach out to Helentarrant.com or Helen@commercialpropertycashflow.com.au