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What do I need to know before I invest in a warehouse?

February 27, 2020

There’s a school of thought that buying a vacant warehouse is a bridge too far. But if you have some experience with commercial property, have decent cash flow, additional equity and are comfortable with undertaking a level of calculated risk, it is possible to make money by buying an empty warehouse.

It’s also critical you work with an experienced commercial property sales and leasing agent such as Raine & Horne Commercial and be fully aware that you can’t buy any vacant warehouse and expect to win financially. 

For starters, industrial property usually presents investors with the highest rate of return. In the south of Brisbane for example, yields on industrial property range from 6.5-7.3% whereas retail property has yields of around 4.5% to 6.0%, and office property is yielding about 6.0 to 6.5% depending on quality and location. Better still, commercial property uses net yields (the return after expenses) to present its rates of return rather than gross yields (returns before expenses) used by the residential property market. Typically, these are 2.5% to 4% gross.

If you are looking to buy a tenanted warehouse, you should ask yourself two key questions. The first is what return per square metre would I get if that tenant was to vacate tomorrow? Then I compare this figure to the current rate. 

It’s also essential that you don’t buy a warehouse based on the lessee (tenant). Commercial property newbies think there is safety and security in “buying the tenant”. On the face of it, this notion might seem valid.

However, let’s assume you have a blue-chip mining company on a lease that has two years to run with an option to sign up for five more years. Many novice commercial investors will judge this to be a situation too good to be true, especially if the company has already operated from the property for many years. Let’s say the lessee is on a lease of $140 per square metre which has reached this rate because of agreed annual increases. In two years, the lessee might decide the rent is too high and decide to vacate. Then suddenly when you try to find a new tenant the best you can achieve is $100 per square metre, and you might have to offer the new occupant some incentives for a fit-out of the warehouse and/or a rent-free period. This $40 per square metre rent reduction effectively represents a property devaluation of 28% overnight. This is what I call “buying the tenant” and is a trap to avoid at all costs. 

Before buying a tenanted property, an astute investor will attempt to entice the tenant to exercise its option early to extend the lease. Typically to facilitate the extension, incentives are offered to the tenant in the form of rent-free periods and/or refurbishment works. These negotiations will involve direct discussions with the tenant under a due diligence clause in the contract and only after you have secured the approval of the lessor (current owner). If the lessor could negotiate such an extension with the lessee before taking the warehouse to the market, he or she will also be able to achieve a better price. That said, some vendors don’t want the hassle or have the time to ‘reposition the asset’ before selling it. 

The second key question to address is based on the warehouse’s configuration, location, and how long would it take to find a replacement tenant? As a rule of thumb, a warehouse should have around 10-15% of the space allotted to office space with the remainder for warehouse activity. You should, for instance, avoid a warehouse with 70% office space and only 30% for industrial activities unless it’s located within an area catering for more administrative work which is typically within a dedicated office park or a city fringe area. 

Truck access is also crucial when buying warehouse space. If you have a warehouse stuck in the corner of an industrial park wedged in against another unit, I’d be cautious about purchasing this asset. Even if a blue-chip tenant is signed to a long lease, getting truck access to the property will prove problematic. Limited truck access will be a turnoff for future tenants. Likewise, if the warehouse offers only laneway access that only utility vehicles can approach this will limit the market for this property. 

These are just some of the factors to consider before buying warehouse space, and I’d urge you to speak to your local Raine & Horne Commercial Sales and Leasing agent today if you’re considering investing in this type of asset.