The Christmas retail rush gripped most of us with $27 billion spent on credit cards alone in December according to Reserve Bank data. But how many of us included diversifying our investment portfolios with a retail property in our New Year’s resolutions for 2020?
To this end, retail is one of the most extensive and varied sectors of the commercial property market. Retail properties are found in every town and city around the world.
A retail shop can be an affordable way to enter the retail property market for first timers. That said, a retail property can also be among the most expensive property assets in Australia.
As a rule of thumb, commercial property investing is more complicated than housing or apartments. By buying commercial retail, you are chasing a cashflow superior to residential, which is the upside if you get it right. But there are significant financial challenges if you don’t follow some simple rules.
Don’t buy vacant
Retail is all about cash flow and buying a property with an existing tenant provides you with cash flow from day one. Unlike a house, the quality of the lease and your tenant is your goodwill. To this end, look closely at the tenant and their business. Are they just selling through the shop or do they have an online presence as well? Retailers need mixed income streams these days.
When we talk commercial, we often include retail property in the conversation. However, be aware that a retail shop attracts different leasing rules than say, office space. The Retail Tenancy Act imposes these rules. Note also that if your retail tenant vacates and a professional services firm moves in, the property switches to a commercial asset. However, a professional services tenant will not generally pay the same level of rent as a retailer.
You need to also look at what the shop would be worth if it becomes vacant and what it will cost to replace the existing tenant and remove their fit-out. For example, I was in a medical suite recently that cost $450,000 to refit the 109 square metre space. If the fit-out doesn’t suit the next tenant, it must be stripped. Alternatively, if the tenant walks or goes broke, the landlord is left holding the can. This is where the ‘bond” and “guarantee” become important. So, it helps if you considered these possible scenarios when setting the bond at the start of the lease.
As part of your search, seek out retail properties with strong lease covenants, market rents and established and profitable tenants who are likely to renew their lease at the option. Retailers benefit from and are stronger when they are close to other retailers. One of Australia’s most famous retailers and investors once told me about a retail building that he owned where he was a tenant in part, “Steven, I don’t want just any tenant in my building. I want someone who will market themselves. When I’m marketing, they’re benefiting. When I’m not marketing, I want them marketing, so I’m benefiting.” There’s strength in numbers.
Future-proofing your investment
It would be best if you also put a plan in place for the time when the current tenant leaves. Therefore, consider if the space is in a profile location such as a main road, while in regional areas adequate parking is essential because countryfolk are more likely to drive to the shops.
As part of your research, consider zoning, this determines what uses are allowed, and any possible nearby developments, especially if there are plans for a major shopping centre, highway diversions, height and density changes for development.
Also, check the vacancy rates in the suburb or town under consideration, while you obtain higher yields in the small provincial areas, there is a reason for this. Remember, above all negotiate your lease renewals early as the cashflow you have purchased may take a while to replace if you lose your tenant.
When all these factors are in place, you’ll have a quality retail investment returning excellent cash flow.
Breakout: Tips to consider when buying a retail asset
Hints to remember when buying a retail property include:
If you’re buying or selling an industrial property, contact your local Raine & Horne Commercial office today.