Observations About Commercial Investment Property in Melbourne

If 2016 is a good indicator in Melbourne, we can expect in 2017 that good quality investment properties will remain in solid demand.   Investors should plan their next acquisitions and set investment targets early.   You never really know when the next ‘ideal’ property is going to come onto the city or suburban investment market.

So, the message is in preparing for your next property purchase, action, or change early, by shortlisting the desired locations, property types, price ranges, and the investment targets that you prefer.  It is wise to work with the property types that you understand and can afford.  Understand the facts of the local property market, and watch the trends of prices, rents, and the associated supply and demand across the targeted Melbourne suburbs.

Lenders today also remain conservative when it comes to advancing funds, and will consider a property comprehensively before providing lending approvals.  Know your lenders policies on advancing funds, and the ideal ‘loan value ratio’ before you proceed to find your next investment property.

Here are some key factors that we predict are still very high on the typical ‘buyers list’ in 2017 with property purchases:

  1. Precinct or Location – the prime precincts are the inner suburbs and the main roads out of the city. Properties in the ‘hot zones’ are desirable and will attract a high price against the passing income.   Determine your ‘priority’ precincts so that you can watch the market in those locations.
  2. Preferred property type and size – determine the properties that you understand from an investment perspective and study the market to see just what is out there now, available for purchase. Look at the prices in the precincts.
  3. Price range – yields are expected to be quite ‘keen’ as prices remain high in prime precincts against passing income. Good quality properties that are realistically priced, usually sell fast.  Be aware of prices in your target suburbs, and then assess your loan capabilities before you go hunting for a property.  It is a good idea to have the finance organised early before you start looking for the next acquisition.
  4. Rent opportunities – assess the rental risks and opportunities on all leases in properties come under your ‘purchase’ or investment consideration. Market rents are one thing to watch, but the passing net income is another.  How do the passing rents in a commercial or retail property relate to market rent?  Is the property ‘over rented’ for the intended sale?  Also, understand the differences between gross, net, face, and effective rents in the location and across the property type(s) that you are interested.  In that way, you can quickly assess leases and tenant situations quickly and effectively
  5. Lease covenants – some leases are better than others over time, especially when you look at the available or passing investment cash-flow. Review all your leases as part of a due diligence process, so you know exactly where the ‘upside’ may in your property purchase.  Also, assess those leases for risk and ‘downside’.
  6. Tenant mix – depending on the property type(s), assess the tenant mix, the leases, the tenants, and the expiry profiles of all the leases. Examine the anchor tenant’s lease for ‘longevity’, structure, and cash flow.  Will the anchor tenant provide customer attraction over time?  Check the anchor tenant’s involvement in the property and the speciality tenants to ensure that they are compatible.
  7. Property maintenance – how is the property maintained currently and are there any major capital expense items coming up? Compare the operational costs and outgoings for the targeted property against the industry averages that apply in the location and the property type.
  8. Rates and taxes – assess the ‘uncontrollable’ outgoings and particularly the rates and taxes to determine the approximate percentage that they may be against the overall total outgoings for the property. What you are looking for here is a ‘blow-out’ above the industry or property averages.  A property with high outgoings presents a problem in cash flow, tenant recoveries, vacancy risk, and investment performance.

So, these things are important as part of property investment.  You can carefully consider them in preparation for your next investment property purchase in greater Melbourne.  We go back to the point that good quality properties produce plenty of enquiry and inspection activity.  Prepare for your next property investment early.