Countering Low Yields With Big Upsides

I've had an eye out for a small shopping centre recently, and I've noticed a few things.

Competition is slightly up on what it used to be and cap rates are lower than they have been over the last few years for this kind of property and in this price range.

I was just doing the numbers on a deal review for my students on a multi-tenanted shopping centre in a great location.

Based on the numbers the yield is a little lower than I have seen in the past… but that does not mean that it is a no-goer.

The property I did the deal review for are the only shops in miles and is fully surrounded by suburbs…

So there are plenty of customers to keep the tenants busy. This makes it a viable long term investment.

It's one of the first things I would look for with this type of property… how are people feeding into this shops? Is there lots of residential? Lots of industrial? How much and how far away is the competition?

In this case, it really is a convenience centre. It has a small supermarket and those kind of shops that I often talk about… bakers, hairdressers, fish and chips, etc…

The sort of shops all the locals would ‘pop' down into to pick up dinner, or pizza, etc

No matter how many big shopping centres they build, people still want and use these smaller centres for convenience sake…

…and no matter how big the internet gets this kind of small business stays afloat because they are essential providers of daily necessities.

Regardless of what the yield works out to be you also need to look at the property itself for more opportunity.

Can you build up? Can you extend out and add another shop or to somewhere?

If you can extend or build up, does that change the carpark requirements? You've got to run that by a town planner (probably before you decide to buy… make that part of your due diligence)

These little things can make a big change to your next valuation and your ongoing rent.

In this case, there was no area behind the shops – The shops back onto the boundary.

I love it when there is spare land out the back because unused land can be a goldmine that most people never do anything with.

Building up in another way to go. For obvious reasons, this is not as easy as developing out the back of a shop.

You need to get town planners and engineers on board to make sure the building is up for it and that, as I said earlier, there are enough car parks, etc…

You also need to get some sort of permission or make some sort of concessions to your tenants given that there's going to be a lot of banging and hammering in the process of a build.

In one of my properties, I am in the process of building up, and I have found a company that builds the units in blocks in the factory, then they truck them in and pop them on top of the existing building.

Amazing where things have gotten to now.

It means the whole process takes 6 weeks instead of 6 months.

This keeps the tenants happy and also get's the result I am looking for faster.

So going back to the original numbers, just because a property is not looking like a fantastic deal right out of the gate doesn't mean you can't turn it into one.

Even as it stands, this particular property looks pretty average compared to what I generally look for… it's still cash flow positive…

…and thanks to standard increases in the rents it will get better and better yields the longer you hold it.

Remember when I look for a commercial property I am not looking for a short-term deal.

Let's face it – if a commercial property is not costing you any money, but rather, it's actually paying you money, then why would you get rid of it?

So if you're looking at a commercial property that is showing low yields, don't throw it in the out pile before you've checked out some of these possibilities first.

There are often things that are not obvious to most people that could change the deal completely…

Of course, this deal I was looking at was in a popular area just outside of a major capital city.

If you take this same methodology to a more rural area, you may get all this potential upside as well as much better yields…

…and get the best of both worlds.

These options and possibilities are available for most commercial properties because unlike those who invest in residential and have to deal with zoning issues… we already know that commercial properties are commercially zoned which automatically opens up many more possibilities…

So feel free to get creative.