Income Optimisation Strategies for Commercial and Retail Property Investments

When you own commercial or retail property in Melbourne, the income you get from your tenants is critical to the result you want as an investor.  For that reason, every lease and its income potential should be optimised to the local property market, and what is possible given local vacancy trends, known supply and demand, and current property enquiry.  The suburbs and the regions of Melbourne all respond uniquely when it comes to property investment and property types.  The zones to think about are:

  • CBD
  • Inner suburbs/city fringe
  • Central suburbs
  • Outer and newer suburbs
  • Regional towns and cities in Victoria

The main arterial roads, the shopping centres, and the city ‘hubs’ are locations to look at in setting your investment plan in place.  What are the suburbs that you prefer to invest in?

Attracting Buyer Interest

When you take your property to the market for sale, you want it to attract enquiry from buyers that are interested in your ‘zone’ or property type.  Good enquiry will help you achieve a shorter time on the market and potentially a better price result.

Any property in a good location will attract reasonable enquiry, but the growth potential of the income stream will be a factor of attraction when it comes to marketing that property for sale.  So, some questions here to think about are:

  • What is the ‘upside’ with your property and its income currently? 
  • Where will the growth be and is that a realistic way of ‘shaping’ your property investments? 
  • Can you clearly define the income opportunities in your property in preparation for a sale situation?
  • Why did you buy the property and will another buyer see the same ‘attraction’?

When you are reviewing those things, then think about these factors in your property:

  • The existing tenant mix by type and placement
  • The upcoming market rent reviews
  • The other ‘income streams’ such as licences and casual leases
  • Vacancies and avoiding them over time
  • The strength and relevance of your lease documents to your investment

Property investment is a strategic process.  In a complex property with multiple tenants in occupancy, the questions are so important.  Where can you start with this idea to build your investment strategy? 

Shaping the Income and Rental Stream

The income (rent and outgoings) for your property are shaped through lease negotiations and tenant selection.  Each lease should be negotiated with a view to achieving occupancy and rent stability; from that ‘base’ the rent can then improve.  Negotiate your leases with the ‘end in mind’.  That is where a good commercial agent can help you.

To help your income potential grow with some stability and opportunity, it is wise to speak to your solicitor and your leasing or managing agent about a lease and rent review strategy that can work for the property and the tenants over the coming years given the known factors of the market today.  A solicitor prepared lease offers alternatives in income ‘shaping’ and generation from things such as:

  1. Rent review timing
  2. Type of rent
  3. Base rent at lease commencement
  4. Method of rent review
  5. Recovery of outgoings during the lease
  6. Option for further lease terms
  7. Renovation strategies for tenant compliance
  8. Make good terms and conditions at the end of lease

These alternatives when considered and placed into a property investment allow the property owner to go to the ‘next level’ of investment performance, or at the very least, remove risk factors that could be holding the investment back. 

A strategy is everything here.  Using the advice of your property solicitor and the comments of an experienced real estate agent will help the property planning process.  A good property income and asset performance do not happen as a result of luck; it is a planned event.

Shaping Your Investment Portfolio

Whether you own a single property, or many in Melbourne, the rules of tenant selection and placement will help you with your investment outcomes.  Here are some of those rules to help you get started:

  1. Choose your properties by type and location with a view of the future.  Look around the location to understand the competing locations and the other businesses in the zone.  City expansion and growth can be reviewed through census data.  Your property investments can be positioned into that census analysis.
  2. What would be the income potential for the location and or the property?  The income is not just from rental, but things such as outgoings, signage, expansion of lettable areas, and capital gain.
  3. What is the business sentiment in the area or the town/city?  Business sentiment drives business success, and hence property occupancy.  It should be noted that local and regional business changes should be understood, as well as any unique industries that are special to your city and town.  So, you have some research to do in Melbourne.  Choose the locations and the property types that you understand.
  4. How long would you like to hold the property as part of your investment portfolio?  From that question and answer, you can look at the leases, the vacancies, and tenants, and the location.
  5. Can you put some diversity into your investment portfolio by purchasing and retaining properties of different types?  That would be across retail, industrial, and office types; locations are also factors to consider.  The ‘diversity’ factor will help you with ‘spreading the risk’ in any industry or property investment change.

The message from all of this is that you can ‘shape’ your investment property portfolio in Melbourne and Victoria over time.  Don’t just look at each lease negotiation ‘singularly’.  Keep the ‘big picture’ in mind as you position your property for improvement and asset performance.

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