When it comes to investing in a commercial asset, a lack of price, or a price guide is one of prospective buyers’ biggest challenges, new research has revealed.
Recent research by REA Group found prospective buyers most requested listing inclusion was overwhelmingly, the request of a price, or a price guide, with 82% of people ranking it ahead of vacancy status (48%) and lease expiry (46%) in information they wished to find in a listing.
Why do commercial property listings often have no advertised price or guide?
The reasons why commercial property listings are more often than not advertised without a price guide is due to several factors, property experts say.
Commercial properties vary considerably in features, tenant profile and development potential, which is part of the reason why properties are often advertised without a price or price guide. Picture: Getty
“Commercial assets are rarely uniform and often possess unique characteristics, whether that’s tenant profile, lease structure, development potential or landholding,” Cushman & Wakefield Australia head of investment sales international director Daniel Wolman said.
“Expressions of interest and auction campaigns allow the market to determine value through competitive bidding while ensuring the seller receives feedback from a broad range of buyer groups.”
The factors that help decide a price
Location, length of the lease, quality of the tenant, development potential and the security of rental income are some of the aspects which influence a commercial property’s value.
Savills commercial sales Melbourne state director Tim Grant said land and building size, and broader economic and market conditions also play a part in value.
“Often, agents prefer to discuss pricing directly so they can explain the property’s value drivers and any upside opportunities,” he said.
Size is one of the factors that influences the price of a commercial property. Picture: Getty
Simplicity Loans & Advisory general manager Ryan Nelson said to some extent, he believed confidentiality also played a part in the lack of an asking price.
“I think in some instances, a direct yield calculation off the back of a lease doesn’t necessarily tell you what the value of something is,” he said.
“So what the market’s prepared to pay versus the yield of it doesn’t necessarily kind of ring true if maybe the property is nuanced, or the details of the lease are nuanced, or there’s something else there.
“I think they’re (vendors and agents) probably cautious to lead with the price because there’s some work to do on understanding the real risks associated with the property.”
For example, he explained that a 6% yield is not the same for each property as other elements including remaining time left on a lease, as well as lease conditions are also factors which were taken into account.
“All of those things would be looked at either favourably or unfavourably when compared to another (listing), and subsequently, then the market will shift to some extent,” he said.
Angus Raine, Raine & Horne Group executive chairman, said there was no general legislative requirement for commercial agents to publish a price guide, and the strength of the tenant’s covenant was particularly important.
“For example, a property leased to a financially secure national retailer on a long-term lease may attract a higher valuation than a similar property occupied by a small business on a short-term lease,” he said.
“Whether the property is considered a prime or secondary asset also matters. Prime properties in desirable locations, with modern facilities and strong tenants, generally command higher prices and lower yields than secondary properties.”
The property’s age, vacancy risk and energy efficiency all come into play when establishing value. Picture: Getty
Other considerations include the property’s condition, its energy efficiency, potential for rental growth, vacancy risk, redevelopment opportunities and demand for the particular type of commercial space.
Investment-grade commercial property’s value is ultimately determined by the balance between income and risk, Mr Wolman said.
“Buyers and investors assess factors such as location, tenant covenant strength, lease security, building quality, planning characteristics and broader market conditions,” he said.
“The weighting given to each factor will vary depending on the nature of the asset, whether it is a leased investment, vacant building or development opportunity.”
Expert advice on how to determine value as a buyer
Locating a commercial asset within your budget is possible but first and foremost a sensible starting point is to establish a clear acquisition budget and financing capacity, Cushman & Wakefield Australia head of investment sales international director Oliver Hay said.
“From there, buyers can analyse sustainable net income against prevailing capitalisation rates and compare the result against recent sales evidence,” he said.
“While no single metric determines value, this process provides a practical framework for assessing whether a property is likely to fall within budget.”
Rental yields for comparable properties can help buyers determine value. Picture: realcommercial.com.au/sold
Researching recent sales of comparable commercial properties and the rental yields being achieved in the local market was helpful, Mr Raine advised.
“For example, if a commercial property generates $100,000 in annual net rental income and comparable properties are selling on a 5% yield, this suggests a value of approximately $2 million (calculated as $100,000 divided by 5%),” he said.
Another tip was to make use of search filters available on commercial property portals and agency websites to identify suitable properties within your price range, he added.
Mr Grant said speaking with active agents and reviewing market evidence will also help buyers understand fair value and identify suitable opportunities within their budget.