Latest / The Follio Property Podcast / Why Commercial Property Beats Shares In Australia | Higher Returns & Control (ft. Cal Doggett)

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Why Commercial Property Beats Shares In Australia | Higher Returns & Control (ft. Cal Doggett) · The Follio Property Podcast

• 0:00
  I'll give you $500,000 to leave. Okay. He's like, yeah, that sounds great. I'm retiring. I bought that property for $3.1 million. It was valued at $4 million that Danny signed. A million dollars in uplift without a 10. You haven't put a dollar down and you've increased valuation from three to six. So you pulled out on paper $3 million. So capital growth does exist. I'm sure.
• 0:27
  Once again, no intro today. We've got someone very special for the second time running. Well, the audience requested it. The listeners loved it. So we welcome back Cal Doggett. Thank you for having me in. I'm, yeah. Welcome, Cal. So last episode when we had you in, we were talking about, I think, why property was the key...
• 0:46
  key focus there, but I thought today what would be good with your experience and your background is to actually hone in on the commercial side. I think a lot of our listeners, we get questions and feedback around commercial. We've not done a podcast to date on commercial, so it would be good to speak to the number one commercial guy in the country and get his opinion on a few different things. Flattering, very flattering. So similar to the first podcast we did with Ikeau, we opened it up saying why property, why commercial?
• 1:16
  Why should you choose that of any other? What a question. Look, firstly, thanks so much for having me, guys. I truly do enjoy this. This is fantastic. Why commercial? I can speak to all the benefits.
• 1:32
  I think just before you speak to benefits, it's like the benefits are only as good as their comparison to other investments. So, you know, money in a bank, great, it's going to give you a return, but can you touch it, feel it, improve its value? You look at residential property, okay, like it can house me and I can live in it, but, you know, am I willing to sell it one day if I'm living in it? Is that going to...
• 1:54
  impact my lifestyle too much. So you start looking at other shares, equities, like I can transfer shares and transact shares like that. So very, very liquid. So when you, I mentioned those because some of those touch on things that commercial property doesn't do, which is why I really like it.
• 2:12
  So for instance, commercial property is quite illiquid in nature. To try and sell a commercial property, you could be, you know, three to six months would be lightning. That would be quick. So you have to, there's usually a due diligence period, then there's a finance period, then there's, and due diligence on commercial could be anywhere from 30 to 180 days, right? Then there's a sizzling period. So not just the property, right? It's typically the business, the cash flow. Totally. All the, you know, when you say due diligence, you do due diligence on a house. You get a building inspection. You get someone to check your contract to sell.
• 2:42
  Yeah. Oh, no, no, no, there's far more. So, yeah, because of the fact that it's inherently rented to someone, they have a legal right to occupancy of your building. Yeah, incredibly can be a lot more complicated than the residential purchase. Right. And because of that, it can be quite illiquid in nature, which, for instance, during COVID, right, there was a patch there in COVID in Australia where commercial property didn't move at all.
• 3:08
  And yet, tenants were not paying the rent, and things were closing down, and you could only get a haircut. Everything else was, but there was literally a six month patch where commercial property did not move at all. Valuers were valuing that the same today as it was yesterday.
• 3:24
  Wow, that's so interesting. Even though people are not paying their rents. Exactly. Because it takes time for that to... to the market to move like that. The share market would drop 15% overnight. Exactly. Because it's so liquid, people take their money out. 100%. Share market, boom, like got smashed, right? So...
• 3:42
  I start with that because it's its comparative nature to other investment vehicles. The fact that you got a tenant paying your rent is amazing only so long as that tenant can afford the rent. And then you start thinking about other things, well, like, am I getting the right amount of rent on commercial property? So we like it as an investment vehicle for us because
• 4:03
  we can generate robust returns from an ASX-listed company in some cases. And I say that because, again, if I were to go buy Woolworths shares or Westfarmers shares, what's my dividend, right? Like sub 6%, I'd be very happy getting a 6%. But I can have Woolworths or Westfarmers paying my rent at 6% in commercial property. So already I'm getting an arbitrage to the share market, right? And then you think, well,
• 4:33
  underneath those four walls is some land. And you go, okay, well land's finite in nature, so there's an inherent value to the actual land itself. So that's a really good example of why we kind of started out in the commercial property game. You can add value with your own hands, you can manage tenants and rents, you can manage expiry dates, you can redevelop, you can create something that humans will interact with differently tomorrow than today.
• 5:01
  So I think by its very nature and the fact that it's malleable, it means that you can generate pretty fantastic returns there, but you've got to know what you're doing. Whereas your choices on the stock market are sell or buy more. I mean, that's it, right? That's all you've got. So we love the fact that there were a couple of different levers you could pull to create value. You just need to understand the complexities in order to do so.
• 5:25
  And with commercial, I think it's understated the capital growth play. I think when people refer to commercial property, historically, more recently, we've seen a bit of a boom, and we were talking about on the previous episode, how you were able to enter and exit. But I think commercial sits in a cash flow conversation.
• 5:44
  which is, it's not true, right? So talk us through that because I think, like you said, that perfect example there, you have Woolworths paying your rent. So essentially there's no outgoings. They're paying you to hold that property. But that rent is sitting on a piece of dirt and that piece of dirt's going up in value. So talk us through that myth of capital growth in commercial, broadly speaking, and then how it's sort of tracked over the longer term.
• 6:10
  Yeah, that's an amazing, amazing question. So, look, commercial property, as you say, yeah, you can enjoy an annual return from it, but people do forget the whole capital nature of it. The thing with the capital improvements or I suppose the capital growth that you can generate in commercial is that you have to pick your time because if there's a lease in place, the fact that there's a lease can actually prohibit you from creating more upside. Yeah.
• 6:34
  So only when that lease comes up for expiry do you then as an owner have access to the land again or to the building again to try and add value. So having said that, a vacant building is worth less than an occupied building in most cases. Okay, in most cases, there's some nuance there. But those are ways of, I mean, we've acquired vacant buildings before, and you go, well, if it's human behavior, would you rather pay more for a vacant asset or a lease asset?
• 7:03
  having money would be great, so lease would be better. So you can buy something vacant and you can lease it up and generate enormous capital growth. Like, I mean, some of the greatest deals, the greatest returns we've done have been in the shortest amount of time. Not because we're some like warrior or hero, but just because from vacant to least is a massive movement in value. Because now- Talk us through an example, people like examples. If you've got a scenario where that's played out.
• 7:31
  Yeah, okay. I've got an amazing example. So I bought an asset in Joondalup and there was a tenant in place and the tenant was paying about- So what type of property? Just give us context. Retail. And this is Perth for those East Coasters watching? Yeah. Joondalup? Yeah, Joondalup. So retail shed? Yeah, essentially. It was a retail showroom, what we would call. And the lease was struck during COVID. So it was a peppercorn rent. They were paying like $100 a square metre.
• 7:59
  Gross, okay, in Joondalup. And now your eyes are doing that because in Joondalup, it's like the second best large format retail precinct in the country, right? Like it's really, really well sought after. So we looked at that and we were like, that's really interesting. They're paying such a low rent. What's market rent? Market rent might be 230 to 240. So literally double. Wow.
• 8:18
  But because they were paying this rent and they had a five-year lease in place, and that lease had an option for another five years, and then another five years, and then another five years, without any escalation, right? So this girl would have been paying the same under-market lease in 20 years' time. Yeah, at a 2% escalation, that's it, but no market reviews. And usually at the end of a lease term, you would go and see what the market is paying, and then the rent would adjust to what the market's paying. In which case, we would have been licking our lips, market rent would have gone, bang, $2.30, right? Doubled. Doubled, right?
• 8:47
  But it didn't. It had five plus five plus five plus five and this guy's paying like next to nothing, okay? So he went to the tenant and I said, I'll give you 500 grand to leave.
• 8:58
  He has the pulse on that. He was like, what? Hold on. Let me get this straight. You're going to give me money and I'm going to go. And I was like, yep. And so what was he paying for the lease for the year? At $115 a square meter? What was that equating to? It was about $1,300 a square meter. So he might have been paying like $140,000 a year, right? So $140,000 a year and you've just offered him $500,000 to leave. I was like, I'll give you $500,000 to leave. Okay.
• 9:23
  He's like, yeah, that sounds great. I'm retiring. I've just gone through a divorce. Perfect timing. Yeah, like this is amazing. Can you do it after divorce? He's like, are you kidding? Like, are you joking? I'm like, I'm not joking at all. I'll give you $500,000 to leave. He was like, where do I sign? So like within a week, we had like signed a heads of agreement, okay? I bought that property for $3.1 million. It was valued at $4 million the day he signed that.
• 9:51
  Million dollars in uplift without? Without a tenant because I had unlocked the ability to lease it at a higher rate. But with a tenant in place, I was like, I can't do anything here, right? So then it went from 3.1 to 4 million. So now I knew I had six months left. You haven't put a dollar in at this point. Not a dollar in, right? Now I've got a contractual right to buy it at 3.1. It's worth four, as the valuation says. And now I'm like, I've got six months before he vacates, I can find a tenant.
• 10:20
  To pay market rent. Put a lease board up, secured a tenant. Property was worth $6 million the moment I signed that lease before I bought it. So you haven't put a dollar down. No dollar down. And you've increased valuation from three to six. Yes. So you pulled out on paper $3 million without a dollar down. Yes. Yes.
• 10:39
  So capital growth does exist. So it does exist. But I use that example because you can see on both sides how the fact that because the tenant had a right to occupy that premises, it actually tied it up. It actually, it meant that the value couldn't go beyond 3.1%. So that's the myth that a lease in place is a better asset when in some cases...
• 10:58
  They've got to be paying the right rent. So in order to, I removed that tenant. I had an uplift in value. And then from that point, it was now vacant, but I could lease it at market rate. So 230, 235, 240 a square metre. And I was able to do that. I ended up getting an international tenant to take the lease. It'll be their first site in Australia. Be very excited when that comes out, I think in about a month or two's time. But what we're saying there is vacant building at $4 million
• 11:22
  worth six million as soon as that lease was signed. Because anyone buying that property now looks at that and says, I'm gonna have an annuity of income from that tenant for 10 years, and that's worth something. And they're paying for that income. That's right. And I think that's what, people get quite confused about commercial property, they don't really understand it, and I get clients coming to me all the time saying, look, I wanna buy commercial property. Say, great, what's your budget? And they're like, I don't wanna spend any more than a mil. And I said, look, okay.
• 11:51
  what are you buying when you're buying commercial property? And they're like, oh, this commercial building. So look around, just where we are. We're gonna be in a retail office area, and they say, oh, look, we could buy the hairdresser, we could buy the coffee shop. These are all tenants that sit in properties that are worth a million dollars, circa more or less. Problem is, it's that when you're buying commercial, it's the strength of the tenant as well, right? Because they're not recession proof, they're not COVID proof.
• 12:18
  And I think that can be the misconception with commercial property. It's not just the building with commercial property. It's not like just a house that, oh, that's nice enough. Someone will live in that house. It doesn't matter the condition, that location. Someone will live in it. Commercial is a little bit different. Yes.
• 12:33
  No, absolutely. There is an enormous amount of value to that annuity that you get from the tenant. Like it can be fundamentally different as a property that's leased versus vacant, right? So yes, you wanna know who your tenant is because they're essentially, and get this, they're your biggest investor. So you buy a building for a million dollars, right? You can finance it, you get the bank to come in, great.
• 13:02
  Maybe the bank gives you 500 grand. How long is that lease in place for? And who's paying the rent? Who's paying the rent? That rent covers the interest to the bank and puts money in your pocket. It covers the outgoings. It covers the water rates, the land tax, the management fees, the council rates, the gardening, the landscaping, the air condition that goes bust. Their rent covers all of those expenses. They stop paying rent. It's the big – the whole thing changes, right? Right.
• 13:26
  So we look at that tenant and we go like, that's our syndicated game, we have investors, but the biggest investor is the tenant, right? So you want to make sure that when you are buying commercial property that the underlying rental annuity that you get is from a tenant that's going to support it. And there's ways of structuring that in a clever way. You can get guarantees and bank guarantees and personal guarantees and you can get rent in advance and things like this to protect the fact that you will continue to receive rent.
• 13:55
  And also your due diligence period, when we talk about the difference, a residential due diligence period will be seven days. It can be up to 90, 180 days for commercial because you're going into these businesses and looking at their longevity, looking at their track record because you want to know whether it is COVID or if it is a GFC or if for whatever reason the market sentiment changes in a particular state, that they will continue to pay their bills, pay their rent and pay the outgoings.
• 14:23
  That's it. And we often say that commercial property is a strange thing because you need to be property minded because it's the four walls and the land underneath it that you're actually buying, right? And in some cases, you might get the right to enjoy rental income, but you also need to be a little bit of an economist in a way because you want to say, is that tenant going to stand the test of time?
• 14:45
  For instance, now, in the retail game, I went on a tour in 2017 to America and they were like, look, online retail is going to wipe out a lot of retailers. So when you look at buying a property, without that knowledge, you go, oh, cool. It's amazing. I've got Sephora as a tenant.
• 15:06
  But if Sephora are going to be, you know, bused next year because of online retail and they haven't been able to keep up, well, it's like, well, Sephora. Well, they change their tack and say, we need to go all online. Yeah. Yeah, exactly. Because we can't have the overheads of paying all these leases, right? They say, let's keep it to them to be online. Totally. Is there like a price point? I know Lachlan mentioned there he gets loads of people and I speak to loads of people as well that think that they're ready for commercial and –
• 15:29
  that's their next asset type. They think of the cash flow and we've just discussed it's not necessarily always the cash flow, but from a commercial perspective, is there sort of a minimum price point that you would look at or is it down to the opportunity, like you said, with some of those examples? Yes.
• 15:47
  There's two answers to that question. The first one is like the lowest price point. I mean, the first commercial I bought was $419,000 and I sold it for $510,000 two years later. Bought it vacant, leased it to a gym, six-year leased to a gym and sold it, right? Fantastic. So that was a $419,000 price point. So yes, you can enter the market.
• 16:10
  Was that gym gonna pay the rent for the next 20 years? Don't know. So that's why I leased it and sold it. You were in and out. I was in and out. It is fair to say that at a higher quantum, you start to afford yourself the privilege of usually better location and better rent, as in better covenant behind the rent. So instead of Jim's fish and chip shop, you start looking at, okay, well I can get KFC to pay the rent. Or I can get BHP to pay the rent.
• 16:36
  And these are business and why we like them is because they're not going bust. They're not going bust, yeah. Or Centrelink, right? Yeah, yeah. They're not going bust. The government backed. A lot would have to go wrong. But I think people don't understand that. Like, well, I like Jim's fish and chips. I eat there every Friday night. Why aren't I back in gyming? That's right. But versus Jim, who, you know, all of a sudden...
• 16:55
  And most Australians go through a fitness craze. They don't want fish and chips. He's out of business. You've got no one paying the bills versus Centrelink, Australian government aren't going to run out of money. Therefore, you are always going to get paid. And that's a critical thing when looking at commercial real estate is you're not just looking at the four walls and the dirt under it. You are looking at who wants to use this land if they currently don't already because you keep talking about that, the use of it.
• 17:17
  who's in there now are they going to be in there in 10 20 years time if not who am i going to put in there that will and that's i think what people probably don't understand it's it's not just a property you have to be an economist a little bit of accounting expert to understand the books of the business yeah and do a lot of dd right that's where you spend all your time it is and you say yeah you look at a lot of frogs and you go oh guys they're not good how many deals you say no to per yes oh
• 17:44
  Jeez, like hundreds. Like our job is to say yes to two properties a year. I mean, that's essentially what it is, right? When I'm taking investor money. It's a great job, girl. You say yes twice a year. But you touched on something there and the words you said like perfect, it's you want to look at what may or may not happen if that tenant ever left.
• 18:03
  If you can answer that question- That's your downside risk. That's your downside risk and it's solved. Commercial property is solved in that one question because if there's potential opportunity for growth or the rent can go up or you can redevelop or there's a change of use coming through or there's another arterial road that's going to link in, all those things are going to imbue the site with future value when that tenant leaves. And if that tenant leaves too early, you're like, ah, damn, my rent's gone-
• 18:28
  got blown up it's like okay well what's the risk of replacing that tenant like how long is it going to sit vacant what am i going to have to offer to a new tenant to come in is there going to be demand from a new tenant so you're right and that's not just the four walls and the land you always need to ask yourself the question is how are humans going to interact with this property if this tenant goes bust or when it's vacant that's literally if you can answer that one question you're away
• 18:54
  And that probably leads into where a commercial property fits in an individual portfolio, be that all in one transaction or in a syndication model. But there's an argument then by spending more. And we're not always, when we're advising clients, spending more is not always better. We've seen some of the best assets at lower price points have higher returns. But in that, when you talk about the covenant, the strength of the tenant, typically by spending more,
• 19:23
  arguably, in theory, you're getting a better covenant, right? And that's probably a better layer of protection. Yes, it can be. Absolutely. And look, ultimately, you want to... I think it's slightly different in the commercial game than the residential game because residential game, you can be an investor, but you could also just be an owner-occupier, right? In the commercial game, it's typically like all investors. I mean, there are a few owner-occupiers around the place, but a lot of the game is investment, in which case it's literally a game of risk versus reward.
• 19:51
  Those are the things you're playing with. So if you have a higher bracket of potential capital to spend, you can buy a safer asset is what we're saying.
• 20:02
  I can go buy a 10 year lease to Dan Murphy's in Midland. They're gonna pay the rent, right? There's never going under. There's always never time. There's always no upside down. There's always no upside down. Like, fantastic, right? But that's gonna cost you $19 million to do that. So yes, more money, safer asset, but not necessarily a higher return.
• 20:22
  Do you see what I mean? So I think, yeah, the scale or the quantum of money you have can afford you greater security and probably a better income annuity from a more reputable tenant. But it doesn't necessarily correlate to returns.
• 20:36
  And that's where I find a lot of clients and we're always doing strategy portfolio meetings to where commercial may fit. And they may come in, look, I'm ready for commercial. And typically they're not going to be in the equity position that I feel comfortable advising commercial because they're going to be playing in that retail tenancy space, the coffee shop owner or the hairdressing tenant, where it's all about risk mitigation. Where I seem with my client base seems to be a fit for it is typically later in the journey.
• 21:03
  whereby they're not looking for 100%, 200%, 300% returns like you can see in that resi space where it can be more capital growth with less cash flow. But they want to be less exposed to the volatility of residential markets and that's why by spending more, that commercial asset where they're going to get a secure cash flow becomes more probable but also in their best interest because we're protecting their downside risk
• 21:33
  by getting them a return from a cash flow perspective, not necessarily capital growth. Is that sort of where you see it in your client base and their stages of their journey? Absolutely. Look, our first 10 or 15 investors were all family friends and they've all retired on the back of income
• 21:50
  being produced by the commercial properties we put them into, right? So yes, later in life makes a lot of sense. About 75% of our investors are using a self-managed super fund. So again, like there's a correlation there between stage in life and having built up enough equity to invest.
• 22:06
  But I also think it is good to look at it as more diversified. So do you want all your eggs in the commercial basket? Probably not. So I look at my mother or my family, for example. Great little portfolio, but they've got five or six residentials that if they needed to just get an injection of cash tomorrow, you can sell a property in 30 days, right?
• 22:23
  like 30 days time, your money's in your pocket, right? Or very close to, you wanna try and sell a commercial, wait six months and 60 days can go by and then the due diligence flops over and blah, blah, blah. And what can happen in that time as you experienced in 2022 and yeah. Yeah, exactly. And then you probably want a little bit of exposure to cash and having some money liquid, but I think it plays a part in a portfolio
• 22:48
  We love it, but even when I look at what I'm doing with my own money, it's not only in commercial. I have got some residential property. Do you know what I mean? I'm a property guy, but what I'm saying is I think it's an allocation of a portfolio. It makes a lot of sense because it can be more stable, and the annuity of it is very refreshing to experience. Renting your pocket on the second of every month is a gorgeous thing to experience.
• 23:15
  Once you experience it, you're like, wow, that's refreshing. I like that, right? Whereas, you know, residential, you can type a lot of capital and it could sit still for quite a while and the rent doesn't even cover your interest potentially. Yeah, and you're paying all the outgoings. And talk us through that. People don't understand. You know, they think commercial property sounds great. So in residential, you know, capital growth, capital growth. But residential, you're paying everything. You get a, you know...
• 23:40
  Everything besides essentially the utilities when you're not there, but even then you're paying Western Power or you're paying. So the outgoings for residential is consuming. And like you said, typically the rental income doesn't cover the costs and in some circumstances doesn't come anywhere near it. We're talking 30, 40, $50,000 cash, cash burns per year. Well, that's not the case in commercial.
• 24:01
  No, you're right. Look, there are particular commercial properties that you are paying the outgoings on, but I would say the typical lease structure is one of a net lease. And I cover this in my mastermind as well, but you can structure a lease such that as an owner, you are literally, you have no costs. You receive a rent and that's it. Even your insurance, you can insure the property for loss of rent
• 24:28
  and the tenant will pay your insurance premium. So that, you know, and then you can even go beyond that and you can structure triple net leases in such that the tenant will actually pay for upgrades to your building. Now, usually that's where you draw the line. Like, it's only so far you go, the tenant goes, oh, Jim's fish and chips going, like, what's going on here? You've marked in here a three-year improvement. Poor old Jim.
• 24:50
  But usually the landlord would pay for like the capital structural items because they're improving a building, right? But anything that's a repairs and maintenance and anything that is there to allow the tenant to occupy that space, they pay for. So like land tax, management fees, council rates, land tax, water rates, repairs and maintenance, landscaping, gardening, gutter cleaning, like they pay for it all, right?
• 25:13
  So that monthly invoice payment that goes out is net, right? It's clean and you're typically going to get a return that's more than what you're actually paying to hold that property. That's right. They're positively geared properties. That's it. I would suggest that unless you really know what you're doing, you probably shouldn't be buying a property where the return rent-wise is not covering your interest.
• 25:35
  Or at least your holding costs. I think a lot of listeners would be in that scenario because it's very difficult in the residential market unless you're buying high-density or you're buying house and land packages in out-of-fringe areas. To get a rental return, because you've got to understand interest rates now in the fives, but it wasn't too long ago they were in the sixes, and to get a 6% yield, you're going into some pretty dicey assets to get that. But in commercial, you're buying A-grade quality assets at those returns. So you're not...
• 26:04
  you're not compromising on asset quality. If anything, you're doing the opposite. Exactly, yeah. You mentioned, obviously you gave you the example of your mom, maybe commercial isn't the right move for her. She's happy with her residential portfolio.
• 26:19
  And I think it's pretty clear that commercial isn't for everyone, but when do you think is the right time in someone's journey that they should start thinking about commercial? Let's say a lot of the clients that we speak with, a lot of the clients that probably listen to this podcast have maybe two, three, four residential properties. They've done well over the last few years, especially in markets like Perth or Queensland recently. When do you think it's the right time for them to start thinking about commercial? Or is it purely going to be down to...
• 26:47
  No, look, yes, their circumstances need to drive some of their outcomes. But to just correct you there, my mum's got a very healthy weighting of commercial property, but she's also got some residential property. I think that if you've got four residential properties and you've got $100,000 cash in the bank and that's it,
• 27:12
  you know, if I were looking at that and I didn't know who that person was, I'd be like, you're pretty leveraged into residential property right now or you're pretty heavily weighted. So maybe a change would be worthwhile. Um...
• 27:24
  And what we typically see is that, you know, kind of 45 plus people start looking at how do I create a more passive investment that I can still touch and feel and that is land backed and that can be commercial for them. Otherwise, some people start looking to shares and it's like, yeah, it might be passive, but every night you're up checking the stock market because, you know, the nerves are very high. You just dropped 20%, but now you made 5%. Oh, I'm up 20%, it's down.
• 27:51
  Totally. It's like, I don't know, you've got to have nerves. It's gambling. It's good for gambling. But if you want something land back that creates an annuity that you can start to plan a little bit more on, like if you're getting $1,000 a month and you know you're going to get that for the next 10 years, you can start to make decisions based on that and plan on that. It allows you to look forward. Whereas if you just get a residential property and you're hoping you're going to get capital growth, it's a lot harder to kind of...
• 28:17
  put the dart in the dartboard and say, we're going to be here in three years' time, right? So that's an interesting paradigm. So I think that people, when they start having families and they move through that kid stage and they start to say, well, I want to be more stability in my life. Commercial can offer that.
• 28:33
  Interestingly, though, the young professionals are in like the best spot to take advantage of commercial. Because if you had to look at your network now, like, you know, an insurance broker, you know, a financial advisor, you know, a dentist, you know, a doctor, you know, your chiropractor, you know, you know, people that run businesses. And guess what they need?
• 28:53
  they need a place to run their business. And so it's like- And you trust the tenant. Totally. You understand the covenant. Totally. So collectively, you can house them. Exactly right. And get your friends to pay you. It's a fantastic model. It is. It's a win-win-win. Like I need, you know, if I'm a dentist or a doctor or whatever it is, and I need space, well, I need space in order to derive my income. And typically business owners don't have the capital to put into real estate because they want to put it in their business, right? Exactly right.
• 29:23
  So like there's a little sweet spot there that I'm finding now with my cohort, like the conversations I'm having around the barbecue are like, wow, like I need space or Hey, like, you know what? My brother-in-law's a radiographer for instance. And he's like, mate, like Jesus radiologists pay a lot of money in rent. I'm like, well, you could go out on your own and,
• 29:39
  you know, maybe we can find you a spider. I know a guy that can find you somewhere. That's it. So I think there's some really fantastic conversations that can be had as you start to get into the real strides of your career and just look at the network around you. Do they need space? And that could be, you know, there's a win-win scenario there if you could find the property, they could be a tenant and you're securing your win-win outcomes for the tenant, obviously, the property and then yourself.
• 30:05
  Wanted it back there a second to your first point, because it's really interesting the way you've sort of just brought it right down to the base level comparing residential and commercial, and sort of the penny just dropped. It's funny, people invest in residential real estate, negative cash flow in residential real estate. It could cost you 10, 20, 30,000 a year to hold that residence, in the hope to get capital growth. Where in commercial, you are buying commercial real estate where it doesn't cost you anything. Often it pays you to hold that.
• 30:36
  Yep. So your downside risk is completely reduced. Yeah. Again, in the hope to get capital uplift. Yes. If that comes, that's really just a positive because essentially you're getting paid to hold the property. So if you get capital growth, that's the cherry on top. It is. Versus residential, if you don't get capital growth, you have to sell it and you're selling for a loss. Yeah.
• 30:54
  So when it's the right time in a portfolio, when you've probably got enough equity, because that covenant that we spoke about is super important. Because the worst thing you can do, and people probably don't understand, is you go and buy a commercial asset and you pay for that tenant. You go and buy Jim's fish and chips because you think he's a top operator and he's never going out of business. But you've paid a premium.
• 31:14
  You've paid a premium for that building because he's in there. And all of a sudden, he backs up, he gets taken over from Siena's Pizza. And then he's vacated, so that property price is dramatically reduced in value. So that, jokes aside, that is the risk. Because once that tenant leaves, the difference with the residential is people need somewhere to live. So your vacancy period is typically limited to, at the moment, a couple of hours. So in a balanced market, it might be a couple of weeks to a month.
• 31:44
  where in commercial, there can be extended vacancy periods, right? If you look at office in some cities, it's not as bad now as it probably was 18 months ago. But there is vacant commercial buildings everywhere at any given time, am I right? Absolutely, 100%.
• 32:00
  Because you're so big on cycles and I love that. And on this show, we talk about cycles all the time. The commercial cycle, you time the peak of the commercial market. You exit it at the best time. We spoke about this on the last episode. Where are we at with the commercial cycle? Where's your view on the global market and how that impacts commercial property? That is a gorgeous question. You know what the thing I'm most worried about in commercial property right now is non-banks.
• 32:31
  So, you know, Australia were very lucky to have an incredibly regulated banking fraternity, right? You know, you can get it so much for individuals, you know, there's APRA, like there's a really regulated system that structures how you can go about borrowing money for residential property, or even borrowing money for your business, or borrowing money for your manufacturing plant, right? Commercial property, the same regulations in place, but not from APRA so much.
• 32:59
  As in, they're not as worried about the individual now because usually it's investment funds coming in and out. And what we've seen in Australia in the last kind of three or four years is like a 40% increase in non-bank finance. So non-regulated finance. Non-regulated finance. And that is fantastic sometimes when you want to leverage really high. But what comes with really high leverage? Really high risk.
• 33:23
  And so I suppose what I'm saying is that a market can have all the fundamentals that you need to see it grow into perpetuity. But if behind that growth, you've got debt levels that are increasing far faster than the rise in value,
• 33:42
  what you're essentially saying is the floor or the tide, as Warren Buffett would say, the tide is running out as you're holding. So that's what I'm worried about. In commercial property, you can generate a return greater than your interest. Fantastic. What's your debt level? Is it 50%? Is it 60%? Is it 70%? In some cases, I've seen lenders now lending 100%, 110% for commercial property. I've done it, right? So like it's,
• 34:10
  If you know what you're doing, I think you can really get in and get out. But as the unregulated finance comes in more and more and more, what it allows is more speculation.
• 34:20
  It allows you to speculate. And that speculation can, I think, cause a tipping point. So in commercial, I think timing our entry and timing our exit has always been important for us. But we want to come back to the commercial property that's going to stand the test of time in good markets and bad markets. And that means you're backing the relevance of the dirt and the four walls. And then you're trying to back the relevance of that tenant.
• 34:44
  So, and we're not the only people doing that. I think there's a whole weight of capital moving towards safer commercial assets. That's why McDonald's and KFCs and drive-thrus are transacting at like ridiculous amounts of money. Because it's safe. That's a corner site on an arterial road with 50,000 cars passing per day. So there's always going to be a relevance to it. And, oh, by the way, you know, the best covenant in the world is paying my rent. Happy days, right?
• 35:07
  So if we're going to answer where the commercial market is in the cycle, listen, so you're going to have to wait until the next episode. We're running out of time. But thanks, Carl Doggett. Love the chat. Cheers, Carl. Appreciate it.