Latest / Contributing to Your Life / The Hidden Risks of Commercial Properties | Ep. 11

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The Hidden Risks of Commercial Properties | Ep. 11 · Contributing to Your Life

• 0:00
  SPEAKER_04: Commercial is yield, commercial is yield, commercial is yield.
• 0:02
  SPEAKER_04: I see people getting carried away with the yield is the most important thing.
• 0:06
  SPEAKER_04: I would say that if you're getting an 8.5% return, you need to be understanding why this person is paying 8.5%.
• 0:14
  SPEAKER_08: Many investors chasing yield in commercial properties often end up buying a problem they didn't see coming.
• 0:19
  SPEAKER_08: A tenant that's leaving, a fit out that no one else wants, at least that looks great on paper but falls apart when you really read it.
• 0:25
  SPEAKER_04: Looking at a property last week, I mean that was a large purchase, that was a$5 million purchase.
• 0:30
  SPEAKER_04: Great yield, over 6%.
• 0:32
  SPEAKER_04: It was 6.11.
• 0:34
  SPEAKER_04: Great opportunity, really, really top, top purchase.
• 0:37
  SPEAKER_04: But that was still negatively geared to the tune of$800 a week.
• 0:42
  SPEAKER_07: Today we've got Scott LeCain, a commercial property specialist who's been building and reviewing portfolios across industrial, retail, and office for years.
• 0:51
  SPEAKER_04: So you've got to remember when you're buying commercial property that you're really buying the income that it provides.
• 0:57
  SPEAKER_04: So the value in a property is not how pretty it is and those types of things.
• 1:02
  SPEAKER_04: It's really in the income.
• 1:03
  SPEAKER_07: He's going to walk us through how to actually evaluate a commercial deal, what the budget changes mean for commercial buyers right now.
• 1:10
  SPEAKER_04: I think people that are buying now and for the next 18 months are going to do really, really well.
• 1:14
  SPEAKER_07: And why the next 18 months could be one of the best windows we've seen to get in.
• 1:20
  SPEAKER_08: If you've ever wondered whether commercial property belongs in your portfolio or how to stop a headline yield from clouding your judgment, this one's for you.
• 1:28
  SPEAKER_04: So the risks that I see buying commercial is f before we get into the episode.
• 1:40
  SPEAKER_00: It does not take into consideration your personal circumstances.
• 1:43
  SPEAKER_00: Consult a qualified professional first before making any investment decisions.
• 1:48
  SPEAKER_08: Right, Aaron.
• 1:49
  SPEAKER_08: Well, um, today I think we're going to talk a bit about commercial property.
• 1:52
  SPEAKER_08: Um, I think traditionally it's been seen as a bit more of an advanced asset class for investors, but we're hearing about it more and more, aren't we?
• 2:01
  SPEAKER_07: Yeah, a lot more.
• 2:01
  SPEAKER_07: A lot more clients uh moving into this space, and uh the commercial conversation is definitely coming up a lot more, uh, especially with those sophisticated investors that you know might have, you know, five to ten residentials uh and they're looking maybe to sell down, draw more equity, and then move into that commercial space because of, I guess, obviously the better yields potentially, uh, and that passive income that everyone's chasing, right?
• 2:22
  SPEAKER_08: Yeah, also we've got some business owners wanting to control their premises or buying commercial um, you know, is a very different game to residential, and you know, they're a bit bored of uh resident might want to go into commercial.
• 2:32
  SPEAKER_08: So you've got a few clients like that as well.
• 2:34
  SPEAKER_07: Um, but there are different risks, right?
• 2:36
  SPEAKER_07: Totally, totally.
• 2:37
  SPEAKER_07: There's uh a lot to discuss with commercial.
• 2:39
  SPEAKER_07: I think what you see on social media is you know, net yield, net yield, net yield.
• 2:44
  SPEAKER_07: Uh, and and no one really talks about uh, I guess, the due diligence behind it and things that you know that we'll discuss today.
• 2:50
  SPEAKER_07: And so we thought we'd we'd bring an expert in.
• 2:52
  SPEAKER_07: You know, we we thought we'd bring in uh our commercial buyers agent, uh Scott Lakaney, to help us unpack some of those questions.
• 2:59
  SPEAKER_07: Scott, welcome.
• 3:00
  SPEAKER_07: Thanks for coming today.
• 3:01
  SPEAKER_04: Thanks for having me, guys.
• 3:02
  SPEAKER_04: It's great that you got KHI doing an educational podcast series, and you guys are doing a great job.
• 3:08
  SPEAKER_04: So it's uh it's really nice to be here.
• 3:09
  SPEAKER_04: Thanks for having me.
• 3:10
  SPEAKER_08: Yeah, and look, a quick background of Scott.
• 3:12
  SPEAKER_08: Like Scott Orsen always a buyer's agent.
• 3:14
  SPEAKER_08: Um, you know, for years he actually um co-operated one of the leading Aussie home loans franchises back in the day, right?
• 3:20
  SPEAKER_04: Yeah, that's right.
• 3:20
  SPEAKER_04: I was very fortunate to have an excellent team over there, and and we built a loan book of a million billion dollars, um, and we were the top Aussie store in the country and and voted the the best franchised um mortgage business in in the country.
• 3:35
  SPEAKER_04: So that was great.
• 3:36
  SPEAKER_04: But largely that was on the back of having a real passion for investment and and education on the side of uh investment property and and really being a part um of that business driving people to buy and invest in in uh in residential property largely at that point.
• 3:53
  SPEAKER_04: Um, and with Monsrill Khan, who needs no introduction to this this podcast, we we got into some some property education through a business called Australian property educators, where we were just talking about it.
• 4:05
  SPEAKER_04: We'd have a have a podcast mic in the middle and we'd sit sit around a round table and chat property, but we'd also do monthly seminars where it was really just about driving education, about how people can build wealth through property investment.
• 4:18
  SPEAKER_04: Um it's really nice now, sort of 10 years removed from that time, to really sit back and think, wow, the portfolios that we were a part of and seeing people build at that time where they are now, it's it's just a testament to people's action and what can happen when you act and you build a portfolio and where they would be now 10 years down the track.
• 4:41
  SPEAKER_04: Um, they would be sitting with nice wealth created through investment property.
• 4:45
  SPEAKER_04: So when Munsrill called about being a part of KHI and coming on as part of their commercial buyers agency team and heading that up, uh I didn't hesitate.
• 4:56
  SPEAKER_04: Uh it's um it's it's an honor and a privilege to help people further themselves with property investment.
• 5:02
  SPEAKER_04: And so it's nice to get back in front of people.
• 5:05
  SPEAKER_04: I I transferred off to doing some development work after the mortgage business finished, um, doing residential townhouses and commercial factory units.
• 5:15
  SPEAKER_04: Um, so to come back to be client-facing, really helping people again in their property journey is really exciting and something that I'm really enjoying.
• 5:23
  SPEAKER_08: So yeah, that's awesome, Scott.
• 5:25
  SPEAKER_08: And you know, I imagine that having that finance background is invaluable in what you're doing right now, right?
• 5:30
  SPEAKER_04: Yeah, well, well, I think I think it's all based on finance, isn't it?
• 5:34
  SPEAKER_04: Because it's leverage.
• 5:35
  SPEAKER_04: If you don't have the ability to borrow and you're not structuring things correctly, you're not moving forward.
• 5:41
  SPEAKER_04: So the the you know, talking to you guys, talking to experts and being able to borrow is the whole key.
• 5:47
  SPEAKER_04: We used because mortgage was never a product to us, it was never the goal.
• 5:52
  SPEAKER_04: Nobody ever wanted a mortgage, so that was never the discussion point.
• 5:57
  SPEAKER_04: It was always talking about people's goals, where they wanted to get to with property.
• 6:01
  SPEAKER_04: And the mortgage is just a tool.
• 6:04
  SPEAKER_04: And you just want to find the best tool to serve that purpose.
• 6:07
  SPEAKER_04: So um, so so it's huge, and and it's something that I'm very cognizant of now as we're chat chatting to people about commercial property, is that leverage aspect is huge.
• 6:18
  SPEAKER_04: That's what drives property investment, and that's what's so unique about it.
• 6:22
  SPEAKER_08: Yeah.
• 6:22
  SPEAKER_08: Now, as someone, I guess, who has uh helped people with more portfolios, and you can probably count or remember, um, I guess one of the questions I wanted to ask you is you know, when should someone actually really start thinking about commercial property when they've been investing in residential?
• 6:36
  SPEAKER_04: Yeah, it's hard, isn't it?
• 6:37
  SPEAKER_04: Because it's a real buzzword now, I guess, commercial, and it's it's become sharper into focus with so much more education.
• 6:46
  SPEAKER_04: 10 years ago, there wasn't anybody talking about commercial property and all the portfolios that we help people build, they're all residential, residential property.
• 6:54
  SPEAKER_04: But there's so much more education now, and people are smarter, and people have cottoned on to what the value and where commercial property fits within a within a portfolio.
• 7:03
  SPEAKER_04: So there's so many more investors now out there looking to get into the commercial side of it.
• 7:08
  SPEAKER_04: But in terms of when is the right time, there's no, I've got four residential properties, bang, I need to get a commercial to add to fix that five property wheel.
• 7:17
  SPEAKER_04: There's not, there's nothing like that, or it's not, geez, I'm 50 now.
• 7:20
  SPEAKER_04: I I'm 50 now, but but it's um it's not, geez, I've hit that point where I'm nearing that retirement in 15 years, I need to really dive into commercial property.
• 7:30
  SPEAKER_04: It's really where they are in the maturity of their existing portfolio.
• 7:34
  SPEAKER_04: So we kind of talk about it if you've got a good amount of equity and you're earning good money and you're prepared to, you know, commercial assets are generally a little bit chunkier.
• 7:45
  SPEAKER_04: You need to spend a little bit more money.
• 7:47
  SPEAKER_04: So you're comfortable now to spend a little bit more money, commercial might be that time.
• 7:52
  SPEAKER_04: And I mean, I I know you've had Ross in here, and he's probably talked about the phases that we like to talk about when you when you when you're buying investment properties, but you you've got three phases accumulation, consolidation, and retirement of your investment portfolio.
• 8:07
  SPEAKER_04: So if somebody's in that, you know, that accumulation phase, that's just buying, buying, buying.
• 8:14
  SPEAKER_04: Yeah.
• 8:15
  SPEAKER_04: And the people that we're seeing starting to think about are those ones in that um consolidation phase.
• 8:22
  SPEAKER_04: So I guess you guys would know this, but when you sit down with somebody and they've got property goals, they generally say to you something like, I'd like to have five million dollars of asset at the end.
• 8:33
  SPEAKER_04: At the end, when it finishes, I'd like$5 million worth of property that's producing me an income.
• 8:39
  SPEAKER_04: How do I start?
• 8:40
  SPEAKER_04: And you say, well, you start with the accumulation.
• 8:42
  SPEAKER_04: The first thing that you have to do is buy five million dollars of property.
• 8:46
  SPEAKER_04: And then you move into that consolidation phase.
• 8:49
  SPEAKER_04: And the consolidation phase is, well, I've got five million dollars of property, but I've also got four and a half million dollars worth of debt.
• 8:56
  SPEAKER_04: So how do how do I how do I how do I get rid of that debt?
• 8:59
  SPEAKER_04: And there's a few ways that people look to do it.
• 9:01
  SPEAKER_04: It's you the most common is time.
• 9:06
  SPEAKER_04: You know, we've got residential property has a has a great history, so you can hang your hat on properties doubling every every 10 to 12 years, which has been proven over the last 50 years.
• 9:19
  SPEAKER_04: So people are comfortable with residential property, they live in a house, they know what they like, they think they know what other people might like, they understand vacancies that it's very, it's very tight.
• 9:29
  SPEAKER_04: So so people really understand residential property.
• 9:32
  SPEAKER_04: So they generally start with that residential buying in that accumulation phase.
• 9:38
  SPEAKER_08: Sorry, I'm just gonna interject there as well, because it could be listeners at home thinking, well, how am I gonna go out and buy five million dollars worth of property?
• 9:44
  SPEAKER_08: Yeah, but you you could possibly be uh talking about you've got to buy assets that will eventually grow into five million dollars worth of property, of course.
• 9:51
  SPEAKER_04: Yeah, yeah, that's that's the other thing.
• 9:53
  SPEAKER_04: And and using residential property in that phase is great.
• 9:58
  SPEAKER_04: And that I mean, five million, I'm not talking about doing five million over five years, it can be over an extended period, that accumulation phase can be over an extended period of time.
• 10:08
  SPEAKER_04: So then you're leveraging off one property into the next property, and it's as they build equity, you're leapfrogging from one to the other.
• 10:15
  SPEAKER_04: But eventually you get to that point where you've where you've accumulated everything that you want to accumulate.
• 10:21
  SPEAKER_04: And I guess the people that really are starting to think about commercial are those ones in that consolidation phase where they're saying, okay, well, I'm waiting now, but what I'm going to own at the end, so so sorry, stepping back, consolidation is waiting.
• 10:36
  SPEAKER_04: So if you wait for a$5 million portfolio to double, we sell down.
• 10:40
  SPEAKER_04: We've just had Munsrel talking to you guys about budget.
• 10:43
  SPEAKER_04: I know there's tax implications and all of that.
• 10:44
  SPEAKER_04: But if we just say in simple terms, if you own$5 million worth of property and you wait 10 to 12 years, those properties will double to 10 million.
• 10:53
  SPEAKER_04: The idea is that you reduce your debt by selling down assets and you're left with a you're left with a$5 million, you know, property portfolio that's producing you income and no debt attached to it.
• 11:05
  SPEAKER_04: That's the that's the dream of people.
• 11:07
  SPEAKER_04: But people are starting to do the maths and with all the education that that's out there, they're saying, I've got five million dollars of residential property producing 4% returns.
• 11:19
  SPEAKER_04: So that's$200,000 coming in.
• 11:21
  SPEAKER_04: I have to pay all of the outgoings and all of the expenses that are associated to that property.
• 11:26
  SPEAKER_04: So I'm left with$150,000 as income, which is great, but it's 3%.
• 11:33
  SPEAKER_04: So then they're saying, well, I'm hearing all these things about commercial property.
• 11:37
  SPEAKER_04: If during the consolidation phase and I've got equity in my existing portfolio and I'm comfortable to buy chunkier assets, I could add that while I'm waiting.
• 11:46
  SPEAKER_04: I could add a commercial property.
• 11:48
  SPEAKER_04: And when I sell down, at least a portion, I at least a portion of the assets that I hold at the end could be commercial property.
• 11:56
  SPEAKER_04: And the difference would be if you're holding$5 million worth of commercial property at that end, they're producing 6% returns.
• 12:05
  SPEAKER_04: And you've got the tenant that's paying all the outgoings and all of the expenses.
• 12:10
  SPEAKER_04: So you're$5 million producing$300,000 at the end of the day.
• 12:15
  SPEAKER_04: So people think about the asset and what the income that it produces more so than back in the day, it's how many properties do I own.
• 12:25
  SPEAKER_04: So it's a shift in thinking from people where they're thinking, not how many properties can I buy, but what is the best spend for income at the at the end.
• 12:36
  SPEAKER_04: And you need the residential because you need that capital growth, you need them to double.
• 12:41
  SPEAKER_04: You know, so you need to you need to put your chips into those assets that we're that we can hang our hat on the doubling of the of the asset so you can pay down debt at the end.
• 12:51
  SPEAKER_04: But it's what debt do you want to pay down at the end and what do you want to own at the end?
• 12:55
  SPEAKER_04: So that's that's probably the first group of people.
• 12:59
  SPEAKER_04: Um sorry if I'm just ram rambling on, but there's some other some others that start to look at it as well.
• 13:06
  SPEAKER_04: Um, so it might be just somebody that wants to diversify.
• 13:09
  SPEAKER_04: So you hear about diversification a bit, and really to me, it's just about putting your money into another another class of property, which residential property is a consumer asset.
• 13:22
  SPEAKER_04: It's it's affected by consumer sentiment.
• 13:25
  SPEAKER_04: So you've got the consumer sentiment, if it dips, properties largely dip.
• 13:31
  SPEAKER_04: Business or commercial property is really governed by business sentiment.
• 13:36
  SPEAKER_04: So they're two different, two different graphs, and they might rhyme, but they are different.
• 13:43
  SPEAKER_04: So you can still have large or high business confidence and lower consumer confidence.
• 13:49
  SPEAKER_04: So that's that's one thing.
• 13:51
  SPEAKER_04: The other diversification is that residential property is largely or can be largely affected by policy changes and government changes, as we've seen with the budget.
• 14:02
  SPEAKER_04: And you can also get lending changes, which we all know about.
• 14:05
  SPEAKER_04: You can have a bank just come through and I mean, and change how they lend to trusts or change how they lend to how they treat um overtime or you know, any anything else.
• 14:16
  SPEAKER_04: So you so you're really at the mercy of how much you can borrow and all those types of things in that consumer residential market.
• 14:25
  SPEAKER_03: Yeah, totally.
• 14:25
  SPEAKER_04: And and the and the commercial properties aren't affected by the same the same changes.
• 14:31
  SPEAKER_04: So we've seen in the budget they weren't affected by all the same changes because they're not trying to cool or they're not trying to look like they're making a difference on the commercial side of side of things.
• 14:41
  SPEAKER_04: So so that's what diversification means to me in terms of just putting your money in and buying properties that that aren't affected, you know, you've got 100% of your properties being affected by decisions.
• 14:54
  SPEAKER_04: You if you're diversifying into commercial, a decision might affect half of your portfolio, but not the other half.
• 15:01
  SPEAKER_04: So it's just it's hedging your bets and and and that's what diversification kind of makes.
• 15:05
  SPEAKER_04: Right.
• 15:06
  SPEAKER_08: So to kind of summarize that, I guess, is that if you look at your portfolio, um, the right time is when you're looking to add something else.
• 15:13
  SPEAKER_08: Like if you think of the each asset in your portfolio serves a particular purpose, yeah.
• 15:16
  SPEAKER_08: Um commercial can bring in uh you know different markets, um, and a bit more of a yield play, from what I'm hearing.
• 15:23
  SPEAKER_04: Yeah, absolutely.
• 15:24
  SPEAKER_04: I mean, that's the you really want your residential properties to be the power behind your portfolio to really generate that capital growth.
• 15:32
  SPEAKER_04: Yeah, but it's but it's uh it's a hit on you on your cash flow.
• 15:35
  SPEAKER_04: So it's really then when people are saying, well, I've got to balance things up here.
• 15:39
  SPEAKER_04: I've got my little my workhorses being my you know my residential properties that are really driving my capital growth in my portfolio.
• 15:46
  SPEAKER_04: I need to even up the cash flow.
• 15:48
  SPEAKER_04: So if you're starting to look at five and a half, six percent net yielding assets, that's what people are trying to do, balance up their portfolio.
• 15:56
  SPEAKER_04: And I guess the other way that people might want to start thinking about um commercial properties if they own a business, they're operating out of a out of a might be a doctor operating out of a um a medical practice, they can buy a medical practice, the building within their self-managed super funds, which is something that you can't do with residential properties and occupy it.
• 16:20
  SPEAKER_04: So there are people that are saying, well, I might as well pay rent to myself.
• 16:23
  SPEAKER_04: I might as well pay the rent to my self-managed super fund.
• 16:27
  SPEAKER_04: And largely you've got to use you guys would say, but it's up to 80%, but generally that 60% or 65% that you would borrow within your self-managed super fund to buy an owner occupied.
• 16:38
  SPEAKER_02: Yeah.
• 16:38
  SPEAKER_04: But then your rent really covers that that um interest payment and it's putting money into your self-managed super fund.
• 16:45
  SPEAKER_04: So it makes sense when people are looking to occupy um a business that they're running.
• 16:51
  SPEAKER_04: So that's the other, that's probably the other one.
• 16:54
  SPEAKER_04: Um, and you guys would probably talk to the to the one that jumps out to you guys most is these the investors that are looking to go forward with their property purchasing, but they reach that wall of borrowing capacity within their residential portfolio.
• 17:10
  SPEAKER_04: So um you guys could could probably talk to it, but it's that whole thing where it's quite regulated on the on the you've got responsible lending and and it's very regulated and it's very conservative on the on the residential side now in terms of how much people can borrow.
• 17:27
  SPEAKER_04: Commercial is exactly as it sounds.
• 17:29
  SPEAKER_04: The banks are making commercial decisions on lending.
• 17:32
  SPEAKER_04: So if it makes sense and it's uh you can tick all of the boxes, it becomes a little bit easier to borrow within that commercial environment.
• 17:40
  SPEAKER_04: So it's people that reach that um that wall of borrowing capacity, but they have access to equity and buffer.
• 17:48
  SPEAKER_04: That's the key that we really need to drive to people as well, is that you're not ready to buy commercial if you don't have access to your equity, if you don't have access to buffers, because there's risks, as you said at the start, with commercial, commercial property.
• 18:06
  SPEAKER_04: And that's really around if your tenant in your residential home leaves, your residential investment property leaves, you're talking weeks that you're gonna be without rent.
• 18:17
  SPEAKER_04: If somebody leaves your commercial property, you could be talking months and you're talking a chunkier asset.
• 18:23
  SPEAKER_04: So you've really got to make sure that you've got those buffers, not just scraping enough for the deposit on that larger purchase.
• 18:30
  SPEAKER_04: You've got to have those buffers around.
• 18:32
  SPEAKER_04: So, so when they hit that borrowing wall, they've got to make sure that they've actually been able to access and have access to the um to the equity in their properties to make sure that they've got sufficient buffers to to cope with uh commercial property.
• 18:47
  SPEAKER_08: Okay, Scott, no, thanks thanks for that breakdown.
• 18:50
  SPEAKER_08: Um now, you know, we want to, I guess, cut through that buzzword of commercial properties.
• 18:55
  SPEAKER_08: A lot of different types of properties out there, right?
• 18:57
  SPEAKER_08: So, do you want to talk to some of the types of properties that you're um finding the most attractive or properties in general?
• 19:02
  SPEAKER_04: Yeah, sure.
• 19:03
  SPEAKER_04: Well, there's three main areas or three main sectors of commercial property that we look at.
• 19:07
  SPEAKER_04: It's industrial warehouses, it's uh retail, and it's office space.
• 19:12
  SPEAKER_04: And they all operate in their own little ecosystem, and and some are softer, some are stronger.
• 19:18
  SPEAKER_04: So it's a matter of picking out what your risk level is, risk profile, and what type of property is going to suit you best.
• 19:25
  SPEAKER_04: So industrial is has been the standout performer in commercial property probably since COVID, where we saw that real boom of the e-commerce direct-to-consumer, the logistics management, um, gyms operating out of factory warehouses, daycares operating out of factory warehouses, car dealers operating out of factory warehouses.
• 19:48
  SPEAKER_04: So the tenant pool for factory warehouses uh in the industrial space really grew, and that really increased capital growth in that sector.
• 19:59
  SPEAKER_04: And there's been a slower growth of rents in that same time.
• 20:04
  SPEAKER_04: So we have seen yields contract in the industrial, but if somebody's looking at an industrial property, it's just important to understand uh the location.
• 20:13
  SPEAKER_04: So close to main arterial roads, um, what's the vacancy rates in that area that you're particularly looking at?
• 20:21
  SPEAKER_04: What's the access for trucks like?
• 20:24
  SPEAKER_04: Um, has the building been converted?
• 20:26
  SPEAKER_04: Is it a purpose built for the people that are in there at the moment?
• 20:29
  SPEAKER_04: They're probably the key things to look at with industrial.
• 20:33
  SPEAKER_08: Yeah, and industrial type properties, I would say generally speaking, are probably more bank friendly as well in terms of appetite.
• 20:39
  SPEAKER_04: Yeah.
• 20:39
  SPEAKER_04: Yeah, well, because the vacancy rates are so low, there's such a simple building, there's four walls, a tilt uh, you know, tilt panel building, it's cement walls and a tin shed roof.
• 20:50
  SPEAKER_04: So they're really simple.
• 20:51
  SPEAKER_04: So maintenance is low, they're attractive, they're simple.
• 20:54
  SPEAKER_04: Um, and and they're bankable.
• 20:57
  SPEAKER_04: However, the yields have come back on those.
• 20:59
  SPEAKER_04: So that's the that's the give.
• 21:02
  SPEAKER_04: Uh, then we talk about retail, and people say that retail properties are dead.
• 21:07
  SPEAKER_04: And that's not entirely true when we're looking at the retail sector.
• 21:11
  SPEAKER_04: Those large format centers uh with the car park in the middle and the boxy, uh, boxy buildings around the outside that have your super cheap auto and your drum and golf, and you know, that style of building is performing really, really well.
• 21:25
  SPEAKER_04: You've got your ASX listed companies within those types of retail businesses.
• 21:30
  SPEAKER_04: So that side of the retail market is still performing really, really well.
• 21:35
  SPEAKER_04: It's more your strip mall with your little um your little dress shop in there or your little uh jewelry shop, clothing shop that has a few red flags or has red flags against it.
• 21:48
  SPEAKER_04: Because essentially, when you're looking at retail, you want to look at those essential services.
• 21:54
  SPEAKER_04: You want to look at the ASX listed tenants, things like medical centers.
• 22:00
  SPEAKER_04: Childcare, I kind of pull into that retail type type segment.
• 22:05
  SPEAKER_04: So they're the sort of properties that you want to look at.
• 22:07
  SPEAKER_04: And anything that requires that discretionary spending of people, people don't have money to walk into shops.
• 22:14
  SPEAKER_04: And I mean, I don't know about your wives, but my wife doesn't walk into a clothes shop anymore.
• 22:19
  SPEAKER_04: It's all online.
• 22:21
  SPEAKER_04: So Amazon packages.
• 22:22
  SPEAKER_04: Amazon packages and another one of mine.
• 22:25
  SPEAKER_04: Hey Brian, hello, it's nice to see you again back again.
• 22:29
  SPEAKER_04: Um, no, so so the way that people are shopping for those types of items have changed, but it's also discretionary spending.
• 22:37
  SPEAKER_04: And you know, you've just been talking about tax for an hour, so we won't get it back into that.
• 22:42
  SPEAKER_04: But but in terms of discretionary spending, it's becoming less and less so essential services, ASX listed, um, you know, good quality, good quality um buildings um is important, and and making sure that you've got good visibility in those and there's plenty of parking is important on the retail side.
• 23:00
  SPEAKER_04: And then finally, um you've got the office spaces.
• 23:05
  SPEAKER_04: And there's probably two markets in the office spaces here.
• 23:08
  SPEAKER_04: So you've got CBD, which is, I guess we would say soft, is the is the way to put the CBD type type leasing.
• 23:16
  SPEAKER_04: And you to get tenants in, you're obviously giving incentives and discounts and furnitures and you know, those types of things.
• 23:24
  SPEAKER_04: I probably asked Frank, I know you've been involved in a negotiation on a on a CBD rental.
• 23:30
  SPEAKER_04: So in in terms of in terms of lease discounts and incentives and things, what was sort of thrown up without talking numbers, but what sort of things were they throwing up?
• 23:40
  SPEAKER_08: Yeah, look, the the market has moved um over time in the time that we've been looking, right?
• 23:44
  SPEAKER_08: So, like at the moment in the CBD, we're seeing somewhere in that 30, 35%.
• 23:48
  SPEAKER_03: Yeah.
• 23:49
  SPEAKER_08: And it really depends on what the asset is.
• 23:51
  SPEAKER_08: So you've got your real A-grade offices there, um, usually owned by your institutional um uh landlords, um, and then you've got the smaller ones actually competing.
• 24:00
  SPEAKER_08: And uh to be honest, it looks like an unfair fight, right?
• 24:02
  SPEAKER_08: Yeah.
• 24:03
  SPEAKER_08: Uh so you see that some of these smaller ones having to throw bigger incentives out to attract tenants.
• 24:07
  SPEAKER_04: Yeah, so they're offering 30% discounts, and I'm sure there's a rental free period, um, and probably I think the one that you're talking about, you virtually fit out as well.
• 24:17
  SPEAKER_04: So you're talking, I mean, the top end of town, you're talking millions of dollars, but that's the sort of thing that we're seeing in the in the um CBD type markets.
• 24:27
  SPEAKER_04: But there is a side of office that is coming back, and it's interesting because it's we've got we've gone through this whole work from home revolution, and we're at that point now where you're seeing a shift where people want to get out of the house.
• 24:39
  SPEAKER_04: They want to they want to move back, they want to get out of their house and their home and their home office and put some pants on and go outside, but it but it's but they don't want to go to the city, yeah.
• 24:50
  SPEAKER_04: So so that regional, that satellite city office on the outskirts of the CBDs and and plonked around the major metro areas, we're seeing really good take up in those and not the same discounts and and good sort of growth in those.
• 25:04
  SPEAKER_04: So I think office is soft and probably the worst performing of the sector, but it's um there's a place, there is still a place for it, and there's still opportunity in the office market.
• 25:16
  SPEAKER_04: Um, and again, if you're looking for offices, we're really looking for accessibility, you're looking for the quality of the building.
• 25:23
  SPEAKER_04: People want mod cons, they want the NBNs.
• 25:26
  SPEAKER_04: You've got to you've got to make sure that you're picking the right office.
• 25:29
  SPEAKER_04: Um, but there's certainly still opportunities within um within the office spaces, yeah.
• 25:34
  SPEAKER_08: Yeah, and you see much of the um like specialized uh commercial properties such as petrol stations, for example.
• 25:40
  SPEAKER_04: Yeah, petrol stations are interesting, and and they're actually proving you know pretty popular at the moment.
• 25:47
  SPEAKER_04: And there's a few, there's been a few for sale that we've seen come and come and go.
• 25:51
  SPEAKER_04: Um the the risk there is an environmental risk and a make good at the at the end of and at the end of that.
• 25:58
  SPEAKER_04: That's the risk on the on the um petrol stations.
• 26:01
  SPEAKER_04: However, you're getting 15 to 30 year leases at and you're seeing 6% returns on those.
• 26:08
  SPEAKER_04: So people are happy to do it.
• 26:11
  SPEAKER_04: Um, as long as you're covering off and you're checking those due diligence boxes for um, you know, soil soil, dealing with the soil at the end of it, dealing with the tanks at the end of it if required, make goods from the from the tenant.
• 26:25
  SPEAKER_04: Those types of things need to be covered off when you're looking at particularly, I guess, the service stations style of things.
• 26:31
  SPEAKER_04: But yeah, there's certainly opportunity, and people are happy to be taking those up with the security of um the returns that are coming in from those.
• 26:39
  SPEAKER_07: So you've kind of highlighted the different types of you know commercial assets, uh, industrial, office, retail.
• 26:45
  SPEAKER_07: What else should clients be looking at when you know they're they're looking at these type of assets?
• 26:49
  SPEAKER_07: Yeah.
• 26:49
  SPEAKER_07: Should I be looking at you know net rent, yield, outgoings, you know, the the type of lease?
• 26:55
  SPEAKER_07: What are some you know things that you check off when you're in an asset?
• 26:58
  SPEAKER_04: The simple things that I would say to people when they're looking initially at uh a commercial property is the same things across all the all the sectors.
• 27:07
  SPEAKER_04: It's your tenant.
• 27:08
  SPEAKER_04: And I will probably dive into this.
• 27:10
  SPEAKER_04: I know we'll probably get into the due diligence, so we'll get into it a little bit more detail.
• 27:14
  SPEAKER_04: But the tenant, who is the tenant?
• 27:16
  SPEAKER_04: What industry are they in?
• 27:18
  SPEAKER_04: What's the future of that industry?
• 27:19
  SPEAKER_04: How long has that tenant been there?
• 27:21
  SPEAKER_04: Um, talk to them.
• 27:22
  SPEAKER_04: What's the what's their future plans with the building?
• 27:24
  SPEAKER_04: What are they what do they want to be doing?
• 27:26
  SPEAKER_04: Tenant, the lease, what is how long to go in the lease?
• 27:31
  SPEAKER_04: What does the lease look like?
• 27:32
  SPEAKER_04: Understand the lease.
• 27:33
  SPEAKER_04: That's really, really important.
• 27:35
  SPEAKER_04: Um, the location, what's the vacancy rates in that area, what's the take up of new builds?
• 27:42
  SPEAKER_04: Is there is there a whole heap of new builds for factory warehouses going on in the area?
• 27:46
  SPEAKER_04: So understand the area and the location.
• 27:49
  SPEAKER_04: Um but the third and well the the last one that I would sort of touch on is that risk versus yield argument.
• 27:59
  SPEAKER_04: So I get I see people getting carried away with the yield is the most important thing.
• 28:07
  SPEAKER_04: Commercial is yield, commercial is yield, commercial is yield, and that's what their driver is.
• 28:11
  SPEAKER_04: So I would say to people that if you're getting an eight and a half percent return, you need to be looking at the risk.
• 28:19
  SPEAKER_04: And that's not to say that you don't buy that property, but you need to be understanding why is this person paying eight and a half percent?
• 28:26
  SPEAKER_04: Is it a regional location?
• 28:28
  SPEAKER_04: Is it a short-term lent?
• 28:29
  SPEAKER_04: Is it month to month?
• 28:30
  SPEAKER_04: Is it been fit out specifically to them that they don't want to leave?
• 28:35
  SPEAKER_04: So they're willing to pay a little bit more.
• 28:37
  SPEAKER_04: So have they fit it out?
• 28:39
  SPEAKER_04: What's the what are the other things?
• 28:41
  SPEAKER_04: There's generally a few hairs on a deal if it's if it's at that sort of eight and a half percent.
• 28:47
  SPEAKER_04: So that's the last thing that I would say.
• 28:48
  SPEAKER_04: What's your risk profile to the to the yield?
• 28:51
  SPEAKER_04: So yield to risk is probably the other thing to really weigh out when you're looking at uh your commercial properties.
• 28:57
  SPEAKER_04: Yeah.
• 28:58
  SPEAKER_07: Yeah.
• 28:58
  SPEAKER_07: And I I think, you know, especially with with commercial assets, you know, you the when the do when you go through that due diligence process, it's uh you find out more.
• 29:07
  SPEAKER_07: And I've seen that, you know, plenty of times uh on the finance side.
• 29:10
  SPEAKER_07: Yeah.
• 29:11
  SPEAKER_07: You know, that you know, net yield was six, but you know, outgoings actually have to be paid by yourself, but they didn't really highlight that.
• 29:18
  SPEAKER_07: You know, what are some other risks that you see or things that come up um that don't necessarily come up in that I am?
• 29:24
  SPEAKER_04: Yeah, that's right, that's right.
• 29:25
  SPEAKER_04: Well, I I think that risk is really the um chasing too much yield is probably the the big risk for people.
• 29:33
  SPEAKER_04: And the other one that I really see is the uh fit out.
• 29:37
  SPEAKER_04: Is it a purpose-built fit out for people?
• 29:40
  SPEAKER_04: And falling in love with the building, not the not the lease.
• 29:44
  SPEAKER_04: So you've got to remember when you're buying commercial property that you're really buying the income that it that it provides.
• 29:50
  SPEAKER_04: So the value in a property is not how pretty it is and and those types of things, it's really in the income.
• 29:57
  SPEAKER_04: So the risks that I see buying commercial is falling in love with the yield and having that and to the disregard of everything else.
• 30:05
  SPEAKER_04: Yeah, the fit out for the for the property, what does it look like?
• 30:09
  SPEAKER_04: Um, yeah, and and buying in a location that's about to be flooded.
• 30:14
  SPEAKER_04: And I guess just a quick example of the due diligence side of things and and and why you do your due diligence and what you look at when you're doing your due diligence.
• 30:25
  SPEAKER_04: It's it's really around we're looking at a property and it was over six percent, um, was over six percent return.
• 30:33
  SPEAKER_04: Um three-year brand new lease, three by three, was signed.
• 30:37
  SPEAKER_04: Location was great, tightly held, so factory unit, tightly held, close to transport.
• 30:43
  SPEAKER_04: Um, cap rate for the area was well below six, it was like five percent cap rate.
• 30:47
  SPEAKER_04: So it's great buying.
• 30:49
  SPEAKER_04: So you so that sparks everybody's interest.
• 30:53
  SPEAKER_04: And then you start to dig a little bit, and this is why we talk about those things that you need to check.
• 30:58
  SPEAKER_04: So, tenant, the tenant had been there for 18 years.
• 31:01
  SPEAKER_04: That was a that was the highlight.
• 31:04
  SPEAKER_04: What's the future of that tenant?
• 31:05
  SPEAKER_04: Well, it turns out that that tenant owned the property, so that was the first thing.
• 31:10
  SPEAKER_04: He was the head of this business, and it was a training coaching style business.
• 31:15
  SPEAKER_04: So he was the figurehead, he was the monsteral of this of this um thing.
• 31:19
  SPEAKER_04: So everything was about him, and he was selling it to retire overseas.
• 31:24
  SPEAKER_04: So he was saying, I'm no longer going to be part of this business.
• 31:28
  SPEAKER_04: So it's a it's a red flag against the tenant, only because there's no real guarantee of what's going to happen beyond this lease.
• 31:38
  SPEAKER_04: Second thing was the lease.
• 31:39
  SPEAKER_04: Once you actually look at the lease and you say, Okay, well, how does that stack up to market?
• 31:45
  SPEAKER_04: Well, he'd given himself a pretty generous lease right before right before he was looking to sell it.
• 31:51
  SPEAKER_04: So so and value is obviously derived through lease, so he wasn't silly, and part of the things that he coached was property, and he was he was clever about clever about all that.
• 32:00
  SPEAKER_04: But it but um so so the lease side of things, I won't say it was over-rented because that would be unfair, but it was certainly at the top end where you would say if I had to turn this tenant over, would I still get that same rent moving forward?
• 32:15
  SPEAKER_04: So that was that was a lease red flag.
• 32:18
  SPEAKER_04: And then the last one was the building.
• 32:20
  SPEAKER_04: So when you look at the building on paper, on the IM, as you said, great, factory, warehouse, all the right, you know, 400 um square meters of letable area, excellent.
• 32:33
  SPEAKER_04: But then when you actually walk through the property, he had fit it out specific to him, full mezzanine across the whole, halfway chopping, chopping the factory unit in half, with with structurally, you know, structural engineering on this floor, full bathrooms upstairs for catering to the 50 people for seminars that they would have upstairs.
• 32:57
  SPEAKER_04: So when I say specific fit out, that was specific to them.
• 33:01
  SPEAKER_04: And so the question was well, who would rent this?
• 33:05
  SPEAKER_04: Factory units were going out the door, there's zero, zero vacancies in factory units, but ultimately this wasn't a factory unit.
• 33:12
  SPEAKER_08: Yeah, um, so yeah, just on that as well, like something to look out for in the lease, I think, is that um what does that make good clause look like, right?
• 33:20
  SPEAKER_08: To your point.
• 33:20
  SPEAKER_08: So, what was the first thing we did after we walked walked back out of there?
• 33:24
  SPEAKER_04: You go back to the lease and you say, Is there a make good?
• 33:27
  SPEAKER_04: No, no make good in the lease that he's drawn up for himself.
• 33:30
  SPEAKER_08: He was very favorable for for himself.
• 33:32
  SPEAKER_04: So there was no make good.
• 33:34
  SPEAKER_04: So ultimately we passed on that, obviously, because just the headline was great, strong, strong yields, long-term tenant, brand new lease.
• 33:45
  SPEAKER_04: Um, really good headline in a great location.
• 33:48
  SPEAKER_04: But once you dig down and you actually start saying, what's important?
• 33:51
  SPEAKER_04: And you compare that to one that we did take up recently, and that and that's a lower yielding property.
• 33:57
  SPEAKER_04: So the headline wasn't as good.
• 33:59
  SPEAKER_04: So it was in the in the fives, it was below six percent yield.
• 34:03
  SPEAKER_04: But this property was a factory unit.
• 34:06
  SPEAKER_04: The fit out, the actual property itself, they could walk out and you would be able to let that to a huge tenant pool, hugely popular, great area, not any more stock coming on the market.
• 34:18
  SPEAKER_04: Um, really tightly held, hugely popular for owner-occupied.
• 34:23
  SPEAKER_04: Um, and then when we looked at the lease, the lease was below.
• 34:27
  SPEAKER_04: The tenant, or I'll go back a step and go through it.
• 34:29
  SPEAKER_04: The tenant had been there for 20 years and had just done an option for five.
• 34:33
  SPEAKER_04: And then I spoke to the tenant personally, which is something you've got to do.
• 34:37
  SPEAKER_04: They want to stay forever.
• 34:38
  SPEAKER_04: They love it, they love the building, the business is going great, they want to stay there.
• 34:42
  SPEAKER_04: They're really excited to be celebrating 20 years in there, and it's a party that they're throwing, and they want to be there and for as long as they can.
• 34:51
  SPEAKER_04: So the tenant was really, really strong.
• 34:53
  SPEAKER_04: The building itself, as I said, it was huge ceilings.
• 34:56
  SPEAKER_04: They had basically fitted out minimally, um, that would be very easy to remove, and your tenant pool to go into a building like that was huge.
• 35:05
  SPEAKER_04: You would you it wouldn't be vacant for long at all.
• 35:07
  SPEAKER_04: Um, and then and then what else do we look at?
• 35:10
  SPEAKER_04: Then we then we look at the lease itself.
• 35:12
  SPEAKER_04: So the lease was under market.
• 35:14
  SPEAKER_04: They've bought in obviously they've been there for 20 years, they've not pumped the rent up on them.
• 35:20
  SPEAKER_04: A good tenant, but we're still able to buy, you know, under six, but the but the cap rate for that area, which is the capitalization rate, which is essentially simply is what's the average rental return on a percentage in that area.
• 35:36
  SPEAKER_04: So we work on that.
• 35:37
  SPEAKER_04: So that cap rate was about 5% as well.
• 35:40
  SPEAKER_04: And right now, so we're still buying over that.
• 35:43
  SPEAKER_04: But for this client, they were buying a property that's under rented, so there's an opportunity there to increase rents and increase yield as time goes on.
• 35:51
  SPEAKER_04: The property itself, if they ever wanted to sell it, if they waited till it was an uh owner-occupied availability.
• 35:57
  SPEAKER_04: So if they waited, the square meter rate is much, much higher in that area for owner-occupied.
• 36:03
  SPEAKER_04: Um, so they're basically going to have an uptick in in lease straight away, and they're gonna have an uptick in the square meter rate.
• 36:11
  SPEAKER_04: So that they're built, they've bought immediate equity, yeah, but it's not the same yield as the as the first opportunity, but everything else really stacks up for a great future investment.
• 36:23
  SPEAKER_04: So yeah, the risk of of just focusing on yield and not focusing on all of those other elements, including that fit out issue, um, is really important when you when you're starting to look at commercial property.
• 36:38
  SPEAKER_07: Totally.
• 36:39
  SPEAKER_07: Yeah, and I think what you said there is so key.
• 36:41
  SPEAKER_07: And I don't know the process in terms of, you know, obviously there's all businesses with commercial uh assets in terms of occupying there.
• 36:49
  SPEAKER_07: You say you mentioned you go and talk to the tenant.
• 36:51
  SPEAKER_07: Is there cases where you can actually get the financials of that business?
• 36:55
  SPEAKER_07: Because that tenant may say anything.
• 36:57
  SPEAKER_07: They may say we're going really well, we'll stay for 10 years, but not going to make it through next year.
• 37:01
  SPEAKER_07: Exactly.
• 37:01
  SPEAKER_07: Or you know, they might not be running out of profit.
• 37:03
  SPEAKER_07: How do we know that?
• 37:04
  SPEAKER_07: How do you how do you kind of run that process?
• 37:06
  SPEAKER_04: Well, well, it is interesting because you do certainly ask that question to the agent.
• 37:10
  SPEAKER_04: And generally, if it's not to be a red flag, you'll get it.
• 37:14
  SPEAKER_04: And if it's a business that's going well that wants to stay and wants to be a partner with you moving forward, you'll receive that sort of that'll you'll receive cooperation because often you go there and they say, someone's buying, they don't want to move in, do they?
• 37:28
  SPEAKER_04: Or or they're they're thinking about themselves.
• 37:30
  SPEAKER_04: So anything that somebody that's going well, that wants to stay, that's engaging with you as an investor buying that property, yeah, you'll get whatever you ask for.
• 37:41
  SPEAKER_04: So they might retract some things out of some financials, which is absolutely fine.
• 37:46
  SPEAKER_04: But if you can see the bottom lines, rental ledges, financials, um, they're the sorts of things that we do want to see.
• 37:53
  SPEAKER_04: And they're not obliged to obviously give it to you.
• 37:56
  SPEAKER_04: But if you don't get it, question it.
• 37:58
  SPEAKER_07: You can question it.
• 37:59
  SPEAKER_04: You know, so so it's all things that then make you can make a judgment call on, you know.
• 38:04
  SPEAKER_04: For sure.
• 38:05
  SPEAKER_04: Yeah.
• 38:05
  SPEAKER_04: So absolutely.
• 38:06
  SPEAKER_04: If you don't ask, you certainly don't get it.
• 38:08
  SPEAKER_08: 100%.
• 38:09
  SPEAKER_08: That's right.
• 38:10
  SPEAKER_08: Yeah.
• 38:11
  SPEAKER_08: Now I think when people are investing, they you know, they like to listen to these kinds of podcasts, and one of the reasons would be that they want to avoid some big mistakes, right?
• 38:19
  SPEAKER_08: So in in your time in building portfolios, whether they be residential or commercial, um, what would you um say some of the mistakes that people really want to avoid?
• 38:28
  SPEAKER_04: Yeah, so I I think we probably just touched on on the ones that I that I I think are huge, and that is the chasing the property that you think is going to produce you the most income to the detriment of everything else.
• 38:40
  SPEAKER_04: That is the first thing.
• 38:41
  SPEAKER_04: And buying something that you can't get out of, when you're buying something, you've got you've got to have an exit strategy.
• 38:47
  SPEAKER_04: And so if you're buying a property purely on yield, but it's the the fit out is so specific.
• 38:53
  SPEAKER_04: And then if that tenant leaves and you're trying to exit and liquidate that property, people buying properties that aren't rentable to somebody else, aren't sellable to anybody else, but the headline yield when you've bought it from the current tenant is so high, yeah.
• 39:09
  SPEAKER_04: That is the big mistake.
• 39:10
  SPEAKER_04: Or buying in an area that, you know, you've got to understand the areas that you're buying.
• 39:16
  SPEAKER_04: Is it a growing population?
• 39:18
  SPEAKER_04: Is it a shrinking population?
• 39:19
  SPEAKER_04: What does the main street look like?
• 39:20
  SPEAKER_04: Am I buying a bank, you know, with the promise of 15 more years on a lease, but that lease is expiring in two years?
• 39:29
  SPEAKER_04: Banks have a habit of walking out of main towns in rural areas.
• 39:33
  SPEAKER_04: So you feel like you've got a really great tenant, but at the end of that lease, first lease period in two years' time with a 15-year option, they can go.
• 39:43
  SPEAKER_04: So you're throwing money at the tenant in that case, but you've really got to understand the area and is the demand for that bank still there?
• 39:52
  SPEAKER_04: Well, is it a diminishing population in that particular area?
• 39:56
  SPEAKER_04: What are what are the um farming fundamentals in in that area?
• 40:00
  SPEAKER_04: And so so understanding where you're buying, understanding what you're buying and who is in there to rent it, and who could potentially rent it after the exit of that existing tenant?
• 40:13
  SPEAKER_04: That's the key to understanding commercial property.
• 40:16
  SPEAKER_07: And for you right now, especially after the budget, why why do you think commercial stands out right now?
• 40:23
  SPEAKER_07: Why is it a potentially, obviously, we've if it's the right fit for clients to potentially go into commercial property right now?
• 40:30
  SPEAKER_04: Yeah, I I think commercial is attractive now.
• 40:34
  SPEAKER_04: I I I don't the budget is one thing, but you never buy property, and we never taught people to buy property for tax breaks.
• 40:42
  SPEAKER_04: So this isn't uh residential versus commercial, because if you were buying residential property correctly and you and your overall plan and you've got the cash flow, your overall plan is to do what we said in terms of that uh, you know, accumulation, consolidation, and retirement, there is a huge place for um residential buying still.
• 41:05
  SPEAKER_04: That's not dead, and I and people shouldn't think it is because you're never buying a property for a tax relief.
• 41:10
  SPEAKER_04: That that's that's rule sort of number one.
• 41:13
  SPEAKER_04: But commercial, I think there's been a flight to commercial because of the yields, because it's an income-producing, because people are starting to understand that it really makes sense to have a property that's going to produce more income with the outgoings paid by the by the tenant.
• 41:30
  SPEAKER_04: If you can get a triple net lease, which is covering land tax and insurance as well as all the other outgoings, you really got no expenses apart from your interest expense within that um within that building.
• 41:42
  SPEAKER_04: So people understanding that drive of cash at the moment.
• 41:46
  SPEAKER_04: And and in this Australia that we're in today, we're really looking for ways to boost that cash into a portfolio.
• 41:55
  SPEAKER_04: So um that's that's one thing.
• 41:58
  SPEAKER_04: I think the long-term leases, so you've got stability.
• 42:01
  SPEAKER_04: There's a flight to stability at the moment.
• 42:03
  SPEAKER_04: So if you've got a five-year lease with a five-year option or a three-year lease, three with a three by three option, you've got some security about that tenant and that income that's coming in.
• 42:13
  SPEAKER_04: So you can plan, you can feel comfortable about that longevity of that income.
• 42:18
  SPEAKER_04: Um, so I think they're the they're the main things that people are looking for when they're when they're looking at commercial property.
• 42:27
  SPEAKER_04: Yeah.
• 42:28
  SPEAKER_07: And in terms of due diligence, can we just go into a little bit of that process and and what you look at in terms of your process when you're looking at a property diligence?
• 42:39
  SPEAKER_04: Well, I guess for anybody, it's what we were saying initially is the the key things.
• 42:44
  SPEAKER_04: It's not rocket science, it's knowing who you who your tenant is and understanding, I guess, the industry, but also their history with the building, what their plans are moving forward.
• 42:54
  SPEAKER_04: So really diving into that tenant and understanding that tenant and where they're at and and in their life cycle of the tenancy, a lot of the times you see sales when there's a transition from father to son, or you know, when there's a transition or period within that business.
• 43:10
  SPEAKER_04: So you just you want to talk to them and understand, uh, understand what their plans are, what the son's plan is, you know, those those types of things.
• 43:18
  SPEAKER_04: So really dive deep in with the tenant.
• 43:21
  SPEAKER_04: The secondly is really understanding the lease.
• 43:24
  SPEAKER_04: So the components of the lease that you really want to know is when is the lease expiring, what are the options, um, what are the indexed growth of that of that rent that's coming in?
• 43:36
  SPEAKER_04: Um, what is the make good?
• 43:38
  SPEAKER_04: We spoke about it.
• 43:39
  SPEAKER_04: It's so important to understand that there's a make good on the property, particularly if there's been a uh quite an elaborate sort of fit out on the onto the property or its um mechanics set up in there.
• 43:51
  SPEAKER_04: What's the actual fit out um obligations of the of the current tenant?
• 43:55
  SPEAKER_04: So there's sort of the the main things to be looking at.
• 43:59
  SPEAKER_04: Um Understanding the building itself, if it's a unique build, understanding who's going to rent it.
• 44:05
  SPEAKER_04: We've spoken about that a lot, but but that's really important to understand the building and what has been built, what has been fit out, is it fit for purpose?
• 44:15
  SPEAKER_04: So really diving into understanding that um that building itself.
• 44:20
  SPEAKER_04: Yeah.
• 44:21
  SPEAKER_04: Yeah, that's important.
• 44:22
  SPEAKER_08: And on the leases themselves, um, because they're quite different to residential leases, right?
• 44:26
  SPEAKER_08: I imagine for people that look at a commercial lease for the first time would look at it thinking, what, you can do that?
• 44:31
  SPEAKER_08: Yeah.
• 44:31
  SPEAKER_08: You can actually put that into the lease.
• 44:33
  SPEAKER_08: Yes.
• 44:33
  SPEAKER_08: And so what would you say the biggest differences are for those out there listening between a commercial lease and residential leases?
• 44:39
  SPEAKER_04: Yeah, well, I guess it's the term and it's the um fixed increases.
• 44:43
  SPEAKER_04: Um but it's the outgoings that you can put in there.
• 44:47
  SPEAKER_04: That that's the that's the key to it.
• 44:49
  SPEAKER_04: You can have a triple net lease where they're paying your insurance, they're paying the land tax, they're paying for the air conditioner breaking down.
• 44:55
  SPEAKER_04: So it's all those incidentals that you can hit, you know, with a property portfolio like we've got, you know, you get a call and you you're out$4,000.
• 45:05
  SPEAKER_04: That was my last one,$4,000 for a fence, and the week before it was$2,000 for a water heater.
• 45:11
  SPEAKER_04: So so all of those incidentals outside of your rent that you're receiving on the residential side, that is really covered on the on the commercial side.
• 45:20
  SPEAKER_04: So a lease really gives you the security of that income.
• 45:24
  SPEAKER_04: So you're not going to get hit with incidental costs.
• 45:27
  SPEAKER_04: So the leases really are set up to cover you as the landlord for that property, that that rental is that fixed figure, and you've got those fixed increases, and you've got the terms that you can have in there is obviously a five by five or a three by three by three.
• 45:44
  SPEAKER_04: Um, so it's all of those things that you can add into that lease.
• 45:49
  SPEAKER_08: Yeah, but you've got to watch out for them, right?
• 45:50
  SPEAKER_08: They're not automatic.
• 45:52
  SPEAKER_08: No, that's right.
• 45:52
  SPEAKER_04: Yeah, yeah, yeah.
• 45:53
  SPEAKER_04: So you've got to know what you're looking at and know what you're know what you're reading when you when you're looking at a um at a commercial lease, certainly, because you know, you can get headline rentals that don't include GST that you know the agent can say that the outgoings are paid, but it's just the rubbish disposal that's being paid, nothing else.
• 46:13
  SPEAKER_04: So you've got to really read through these commercial leases to really understand what's being covered and what's not being covered.
• 46:18
  SPEAKER_08: So and they're typically reviewed by legal counsel on on either side most of the time.
• 46:23
  SPEAKER_04: Yeah, absolutely.
• 46:24
  SPEAKER_04: I mean, we we will look at them and advise people, but we would all always send it to the solicitor and always get get legal to legal document.
• 46:32
  SPEAKER_04: You want legal advice on on such a big purchase and and the lease being such a huge component of that purchase.
• 46:40
  SPEAKER_04: Um, so you really want to make sure that you're getting the right advice on it because I mean, values, the switching mentality from buying residential property to buying commercial is buying it, buying the lease, buying an income, buying, not just buying a building, not buying a property.
• 46:56
  SPEAKER_02: Totally.
• 46:57
  SPEAKER_04: You're buying that income.
• 46:58
  SPEAKER_04: So it's a huge part of how they value the property.
• 47:01
  SPEAKER_04: So it should be a huge part of the decisions that you make when you're looking to buy commercial properties, really understanding the lease and understanding what the dollars are net of all expenses at the end of that.
• 47:14
  SPEAKER_08: Yeah.
• 47:14
  SPEAKER_08: Now we couldn't do this uh podcast uh with uh actually all of us having a finance background without touching on the finance side of things.
• 47:21
  SPEAKER_03: Yeah.
• 47:22
  SPEAKER_08: Um, so I guess typically today when people are buying commercial property and obtaining funding, um, there's two really main uh ways that they would do that, um, either through like a full assessment or um what we refer to as a lease stock, a number of lenders offering a lease stock.
• 47:36
  SPEAKER_08: Does that change your approach and how you're gonna actually um assess and complete your due diligence?
• 47:41
  SPEAKER_04: Yeah, absolutely.
• 47:41
  SPEAKER_04: I think if somebody is really, really strong with income, strong with equity and buffers, and they can actually, you know, show all of their documents and they're in a position to get a full document loan with a lender, I think that opens up more opportunities for us.
• 48:00
  SPEAKER_04: Um I mean, there might be a slight, you know, slightly more risk in looking at a vacant possession, but there's also more opportunity in looking at a vacant possession because then you're now leasing in real terms today's value.
• 48:13
  SPEAKER_04: So you can really put a today's value on your um on your vacant possession property.
• 48:18
  SPEAKER_04: So you've got the opportunity if you're doing a full doc loan to buy vacant possession.
• 48:23
  SPEAKER_04: Um create some space.
• 48:25
  SPEAKER_04: You can you can put some petition walls up and turn a big shed into two or three and and and rent them.
• 48:31
  SPEAKER_04: Um, you know, create more net letable space by putting in a mezzanine level if something's empty.
• 48:37
  SPEAKER_04: So the opportunities, if you're able to get fully assessed and buy, it gives you the opportunity to look at a broader range of properties.
• 48:46
  SPEAKER_04: Lease stock loan is is a great way for people to get into commercial property and it's simply looking at the lease as opposed to what's being borrowed and doing an assessment on the commercial nature of that deal.
• 48:58
  SPEAKER_04: Is it does it make sense?
• 49:00
  SPEAKER_04: Will it work?
• 49:01
  SPEAKER_04: But you guys will tell me more than I can tell you these days, but they will look at the style of property, the the um lease.
• 49:09
  SPEAKER_04: So how long to go in the lease, what are the lease terms?
• 49:12
  SPEAKER_04: The bank dives through the lease because it's all on the lease strength.
• 49:15
  SPEAKER_04: So they dive through the lease.
• 49:17
  SPEAKER_04: Is it industrial?
• 49:19
  SPEAKER_04: Is it retail?
• 49:20
  SPEAKER_04: Is it office?
• 49:21
  SPEAKER_04: Those types of things will affect how much you can borrow against those assets.
• 49:25
  SPEAKER_04: So it is limiting in the fact that you will be scrutinized more by the bank and the asset that you're buying, but you've still got that opportunity coming out of, you know, generally people are looking at those lease stock loans when they've hit that brick wall with their residential lending, they'll really start to look at that lease stock opportunity.
• 49:47
  SPEAKER_04: But I think if you're looking at the lease stock, you still you need to be able to borrow that against the equity in your existing residential portfolio with the buffer before you come over and um look to look to do that.
• 50:02
  SPEAKER_04: Lee stock loan.
• 50:03
  SPEAKER_04: What do you think?
• 50:03
  SPEAKER_04: That's that's sums it up.
• 50:05
  SPEAKER_07: Yeah, totally.
• 50:06
  SPEAKER_07: I think you summed it up perfectly.
• 50:07
  SPEAKER_07: And I think what people need to understand with commercial, especially going new into commercial, is the amount of deposit, especially where the rates are at the moment.
• 50:13
  SPEAKER_07: And like you said, industrial, for example, 4% net.
• 50:17
  SPEAKER_07: Uh and if people are borrowing you know equity from their residential portfolios, uh, they need to be mindful of the cash flow as well, because they need to take that into account, you know, rather than say using cash.
• 50:27
  SPEAKER_03: Yeah.
• 50:27
  SPEAKER_07: Um, so I think that's the thing that people need to think about.
• 50:31
  SPEAKER_07: And the question I get asked, Scott, all the time is well, at what price point can I get into commercial?
• 50:36
  SPEAKER_03: Yeah.
• 50:36
  SPEAKER_07: Uh and so I guess we throw the question to you.
• 50:39
  SPEAKER_07: Yeah.
• 50:40
  SPEAKER_07: You know, you know, people say it's a million bucks, it's the minimum, people say it's more, but what are you seeing in the market?
• 50:45
  SPEAKER_07: What would be the minimum people should be?
• 50:47
  SPEAKER_04: Yeah, there's no there's no hard and fast rule, but I but I think we generally look, we try and play in the space that sort of that one and a half million to five million is sort of the space that we like to play in.
• 50:59
  SPEAKER_04: Um, that is below your institutional, like your CBD owners of those those big towers and things like that.
• 51:05
  SPEAKER_04: That's below that institutional buyer.
• 51:08
  SPEAKER_04: And it's above, I guess, your your mum and dad investor and the tradie that wants a shed to operate out of, or somebody that's looking for somewhere to put their storage.
• 51:18
  SPEAKER_04: So anyone that's gonna own or occupy a factory warehouse, I'm concentrating on factory warehouses here, but some say a tradie wants to operate out of a factory unit, somewhere to put all his gear, somewhere for the guys to meet in the morning and somewhere to have an office.
• 51:33
  SPEAKER_04: He's not worried about what it's gonna rent for because he's gonna he's gonna occupy it.
• 51:38
  SPEAKER_04: And then you've got your mum and dad investors that are coming from buying, you know, six, seven, eight hundred thousand dollar um residential properties at four percent gross down to three percent net for their residential.
• 51:53
  SPEAKER_04: And they say it's four and a half percent net.
• 51:56
  SPEAKER_04: That's fantastic.
• 51:58
  SPEAKER_04: So so they're jumping in, they're jumping into those.
• 52:01
  SPEAKER_04: So um the opportunity kind of lies above that sort of one and a half million to that sort of five million mark, is really where opportunities lie, where you're you're getting a good yield, you're getting a good strong product.
• 52:15
  SPEAKER_04: Um, so that that's on price point, that's what we would sort of say in regards to where we like to play, which is above what people have been spending on um residential properties generally in their investment portfolio.
• 52:29
  SPEAKER_04: So people need to be cut comfortable that they're gonna spend a bit more, but they need to use more cash or equity and have buffers when they get into that um commercial buying.
• 52:42
  SPEAKER_04: So people need to be comfortable with having a um a chunkier, a chunkier purchase.
• 52:47
  SPEAKER_04: So the the right person generally will have good income screen stream, good equity within their residential portfolio, um, but but also earning good money is generally the person that wants to be looking at that commercial.
• 53:01
  SPEAKER_04: Yeah.
• 53:01
  SPEAKER_04: So probably the other thing to touch on, I think we did earlier, but the self-managed super fund um borrowing.
• 53:09
  SPEAKER_04: Do you want to touch on that, Frank, in terms of buying within your self-managed super fund commercial?
• 53:14
  SPEAKER_08: Yeah, so that that's obviously coming becoming quite a lot more uh popular, whether that be an investment or um own occupied, right?
• 53:21
  SPEAKER_08: So super fund, um there's a lot of more flexible policies available these days in the super fund that make that a lot more obtainable.
• 53:28
  SPEAKER_08: Um, still being able to borrow 80% or even higher if you're willing to pay some risk fees and things like that.
• 53:34
  SPEAKER_08: Yeah.
• 53:34
  SPEAKER_08: But yeah, that's a really good way for people to actually control the asset that they're operating their business out of.
• 53:39
  SPEAKER_04: Yeah.
• 53:39
  SPEAKER_04: And I think sometimes people see the cash sitting in their super funds and think I could control this.
• 53:48
  SPEAKER_04: And if I could put that as a full deposit into an investment property and a commercial investment property, the return that I'm getting on that deposit money, um, the leverage, I mean, that it's amazing that you can, like I said it at the start, leverage is the key.
• 54:05
  SPEAKER_04: So the fact that you're able to borrow to buy property in your self-managed super fund, you're turning your$500,000 that's sitting in your super fund into an asset that's worth$1.5 million and getting capital growth across that property and getting 6% return on it.
• 54:24
  SPEAKER_04: It makes sense because you've you've turned$500,000 into you know$1.5 million asset and the rent's covering the debt that you've you've borrowed to buy it.
• 54:35
  SPEAKER_04: So leverage is the key to that self-managed super fund um opportunity that people have.
• 54:42
  SPEAKER_04: So that's the other group that we see that are buying is those people wanting to invest themselves in their self-managed super fund and control where that money's going.
• 54:51
  SPEAKER_08: Yeah, of course, do seek the advice before you go out and uh set that self-managed superfund.
• 54:59
  SPEAKER_08: Yeah, I think so.
• 55:00
  SPEAKER_08: I think so.
• 55:01
  SPEAKER_08: Um Scott, I wanted you actually help us unpack um a headline I see quite often, which I think can be a little bit misleading, right?
• 55:08
  SPEAKER_08: And yes, we've we've spoken about how uh commercial property can be better yielding and and cash flow positive, right?
• 55:15
  SPEAKER_08: Now, my feeling would be that if your deposit and cost were also borrowed, right?
• 55:20
  SPEAKER_08: I'm not sure that there's many properties, if any, out there that would genuinely be cash flow positive, would that be right?
• 55:26
  SPEAKER_04: I would say that's 100% correct.
• 55:28
  SPEAKER_04: Um looking at a property uh last week, and I I think I I sent it out to everybody just to have a look at it.
• 55:36
  SPEAKER_04: And when you actually put it with borrowed equity, it's still negative.
• 55:41
  SPEAKER_04: So, and that was over 6%, it was 6.11, um, great yield, great opportunity, um, really, really top, top purchase.
• 55:50
  SPEAKER_04: But that was still negatively geared with every everything borrowed.
• 55:55
  SPEAKER_04: Um, I mean, that was a large purchase, that was a$5 million purchase, but that was negative to the tune of$800 a week.
• 56:02
  SPEAKER_04: Um, if they put in the deposit themselves um through through cash, obviously it was very, very positive.
• 56:08
  SPEAKER_04: It was sixteen hundred dollars positive um a week.
• 56:12
  SPEAKER_04: But if you're looking at leveraging off your existing equity, you need to be mindful that that property will still be negatively geared.
• 56:21
  SPEAKER_04: Um, I guess the flip side to that is why people looking at commercial property.
• 56:25
  SPEAKER_04: You asked me a little bit earlier.
• 56:26
  SPEAKER_04: One of the things I forgot to to throw in there was the the change in in the um in the budget.
• 56:33
  SPEAKER_04: So within commercial space, you've still got the opportunity to claim negative gearing against um against um commercial purchases.
• 56:43
  SPEAKER_04: The whole goal of the budget was to cool the residential market down.
• 56:48
  SPEAKER_04: It wasn't targeted at business, it wasn't targeted at commercial.
• 56:51
  SPEAKER_04: Um, that doesn't get the headline.
• 56:54
  SPEAKER_04: So they so they really were looking to target and focus in on the residential, um, which is what the negative gearing changes had effect on.
• 57:04
  SPEAKER_04: So there's been no change at this stage to the ability to claim negative gearing against your income as you go on commercial commercial borrowings.
• 57:14
  SPEAKER_04: But yes, certainly if you're if you're buying, it's not going to be positively geared.
• 57:18
  SPEAKER_04: If you're borrowing 105% to cover costs and the 100% purchase by using equity in a residential portfolio, you've still got to be mindful that you need cash, you need buffer, you need um, yeah, you need some funds to put put in towards that purchase.
• 57:33
  SPEAKER_07: And have you just kind of wrapping up in terms of the commercial market, what's happening on the ground at the moment?
• 57:40
  SPEAKER_07: Do you see fear sentiment still going on, or do you see people in the commercial space saying, you know, I want I want to get in now?
• 57:47
  SPEAKER_07: What are you seeing currently?
• 57:48
  SPEAKER_04: I think people are still really keen, and I I think it's really going to push forward.
• 57:51
  SPEAKER_04: The more that people really understand now what the changes, you know, the effect that the changes are going to make, I think commercial property is really going to push forward.
• 58:02
  SPEAKER_04: Overriding themes are that yields are contracting.
• 58:07
  SPEAKER_04: There's been some good capital growth, but yields are contracting as rent's not keeping up with the with the growth of properties, and people are willing to buy commercial property with lower yields.
• 58:17
  SPEAKER_04: People are just desperate to get in, and that's never a good place to be.
• 58:22
  SPEAKER_04: So um yields are certainly contracting, um, but the opportunity within commercial, I think, is going to be huge as people really see it as a viable opportunity to get into, and that and more education happens.
• 58:36
  SPEAKER_04: There's more investors fighting over fewer properties.
• 58:39
  SPEAKER_04: So residential properties turn over 600,000 properties a year, commercial turns over 6,000 properties a year.
• 58:47
  SPEAKER_04: So you've got all these people that are moving from, okay, well, I'll move from a residential portfolio and add commercial.
• 58:53
  SPEAKER_04: Well, all of those people are just adding to the demand.
• 58:57
  SPEAKER_04: So you've got a you've got a situation where demand has been outstripping supply, which is causing people to pay more, which is causing yields to come back.
• 59:07
  SPEAKER_04: So it's really about picking your spots, taking opportunities and looking for those opportunities where something is underrented, um, looking for opportunities where you can add net letable space and increase, increase rent across the property that you're buying.
• 59:23
  SPEAKER_04: So we're really looking for properties that we can add value that are being leased under under market.
• 59:29
  SPEAKER_04: Um, and there's some real opportunities, but in terms of people's sentiment towards it, I think the sentiment will be a flight to commercial in the next 18 months.
• 59:40
  SPEAKER_04: I think we have an opportunity to be buying well and doing really well out of the next five years of a good amount of growth, you know, in the commercial sector.
• 59:51
  SPEAKER_04: I think people that are buying now and for the next 18 months are going to do really, really well buying commercial, buying commercial property.
• 59:59
  SPEAKER_04: So yeah.
• 1:00:00
  SPEAKER_08: I think that's spot on, Scott.
• 1:00:01
  SPEAKER_08: And look, to kind of summarize today, I guess, look, commercial property is a different strategy.
• 1:00:06
  SPEAKER_08: Yeah.
• 1:00:07
  SPEAKER_08: It's not automatically better, but it needs to actually uh suit the need that your portfolio has, right?
• 1:00:13
  SPEAKER_08: It has a serves a very, very different purpose.
• 1:00:15
  SPEAKER_06: Purpose, yeah.
• 1:00:15
  SPEAKER_08: And people should be really looking at that due diligence of, you know, I would argue probably deeper than uh residential lease in particular.
• 1:00:22
  SPEAKER_04: Absolutely.
• 1:00:22
  SPEAKER_08: And uh look at a nice quality asset for the long term.
• 1:00:25
  SPEAKER_04: Yeah, absolutely.
• 1:00:26
  SPEAKER_04: Yeah.
• 1:00:27
  SPEAKER_04: Totally agree with that.
• 1:00:28
  SPEAKER_04: I think I think that's the it's not for everybody's circumstance.
• 1:00:32
  SPEAKER_04: It's for when people are ready with equity in their existing portfolio, they're starting to think about the end.
• 1:00:37
  SPEAKER_04: What is the income?
• 1:00:38
  SPEAKER_04: When they stop thinking about the property and they start thinking about the income, that's when commercial comes into play.
• 1:00:43
  SPEAKER_04: And it's not for everybody, it's not if you've got a huge deposit to your first first purchase.
• 1:00:48
  SPEAKER_04: It's not for you.
• 1:00:48
  SPEAKER_04: If you don't have the equity or you're just got a fear of missing out and you want to dive in with a skinny deposit with no buffer, it's probably not for you either.
• 1:00:57
  SPEAKER_04: So it is for the right person at the right time within their property journey.
• 1:01:01
  SPEAKER_04: And um, but it can be really beneficial owning those assets in the retirement phase, having certainly a portion of your end portfolio being made up of commercial property can be a real winner for people.
• 1:01:17
  SPEAKER_08: Right.
• 1:01:17
  SPEAKER_08: Well, thank you, Scott.
• 1:01:18
  SPEAKER_08: Thanks for coming in.
• 1:01:19
  SPEAKER_08: Yeah, thank you.
• 1:01:20
  SPEAKER_04: Thanks for having me.
• 1:01:21
  SPEAKER_08: Thank you, Scotty.
• 1:01:21
  SPEAKER_06: Thanks, guys.