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What do I need to know before I invest in office space?

February 26, 2020

There’s rarely been a better time to add an office to your property portfolio. Better still, office space can generate an excellent income for investors with low maintenance and a reliable tenant that may settle in for many years.

But before you start looking for office space for an investment portfolio, there are a few issues to consider. Let’s start with buying tenanted office space as an investment, which helpfully doesn’t attract GST. Therefore, there is an immediate saving on any leased commercial investment.

That said, if there is a lease against the property, you must consider the length of the lease term. Ideally, the contract should have at least two years to run, although this rule of thumb is flexible and is subject to your investment strategies and goals. Likewise, you must check on the security bond that is in place. The amount of the security bond offered by the tenant is usually three months’ rent, including GST. Anything less than this, and I’d be asking questions.

If you have a tenant in place, check on the annual rent increases negotiated as part of the lease, and whether the increase is in line with accepted market practice. Also, does the lease have an option for an extension when it runs its term? If there is an extension, consider the possible negative and positive impacts on the value of the property.

At this juncture, it would be worth doing some homework on the impact on your returns if the property becomes vacant, how long will it take to find a new tenant vacancy? An empty property might also impact its value, which is another factor to consider.

Furthermore, when considering buying an office investment, is the ‘yield’ comparable to other sold leased investments in the local patch. The valuation of tenanted properties is a combination of a yield analysis and a direct dollar per square metre ($/sqm) comparison. Finally, it would help if you considered possible capital costs that might pop up as part of maintaining the office building or your strata unit.

What to consider when investing in a vacant office property?

Begin your analysis by confirming the exact net lettable area (NLA) of the property as this will be your unit of measurement to compare properties values with those of tenanted spaces. Is the $/sqm (price divided by the area) comparable to other properties that have sold in the local patch?

Also check the property’s proximity to public transport, as this will have a significant impact on values – and more so than a residential investment. Also consider how much natural light the office provides, remembering that office workers spend most of their working days indoors. Potential tenants will be on the lookout for the natural light offered by the office space – as well as how well it presents.

Like a tenanted office space, you must consider the impact that the new lease will have on the value of the property, how much rent you can expect a tenant to pay and the return on investment this delivers.

If you’re buying or selling an industrial property, contact your local Raine & Horne Commercial office today.