Update - January 2018
A question we are often asked is; “Why would I want to sell when I have a fully leased building? “
The answer is that commercial property is more often than not worth more when it is 100% leased than when if it has a vacancy. We have had this question on numerous occasions when speaking to owners about selling their commercial premises, particularly if they are reluctant to sell because their property is leased and is providing a nice income stream. Then inevitably, we get the phone call a year or two later, and they say, “I can’t believe it, one of my tenants is now vacating, do you think you can sell it for the same price we discussed about two years ago?”.
Unfortunately, there is a good chance that the property with a vacancy is not worth what it was worth when the property had good tenants in place. We have seen numerous buildings worth considerably less when vacant as compared to when they were leased. There can be definite value to having a tenant(s) in place.
We were recently discussing this circumstance with a client who has a vacant building. He had a great, long term tenant in his building paying good rent for a number of years. Suddenly, the tenant’s business model changed, and the building no longer suited their requirements, so they vacated at the end of their lease. This building has now been vacant for more than 2 years while we have searched for another tenant, or buyer for the property. Upon running the numbers from when the property was leased and what the property would have easily sold for, we realised that the property instantly lost at least 10-15% of its value when the tenant decided not to renew the lease and vacate.
Why is this? Firstly, commercial investment properties are great when they are leased because businesses don’t like to relocate and risk losing clients or customers. Along with the added expense of moving, many tenants may pay a little more rent than market just to remain in the premises. On the flip side though, when the property does go vacant (and they ALL do at some point), it can be months or even years to find another business to fill that vacancy.
Investors pay far less for vacant properties because they must also factor in an anticipated vacancy period (this can be difficult to determine!), the holding costs whilst waiting for a tenant (Land Tax, Rates, Insurances, upkeep, etc), leasing fees, and any potential upgrade costs or rent-free incentives associated with securing a new tenant. Adding these costs to a building that has no rental income drastically drives the value down.
Therefore, the perfect time to sell is when your property is fully leased. If you think selling may be in your future, it would be to your advantage to investigate the option of selling while your commercial property is 100% leased and has the security (added value) good tenants in place. If you wait until the property becomes vacant, there is a good chance you may be disappointed with the market value of an empty building.
We have a large data base of investors seeking for commercial property and if we can be of assistance please feel free to call our office on 6584 0544.