A recent Burgess Rawson auction in Sydney and Melbourne saw 130 million worth of commercial real estate get snatched up by desperate investors.
Why, so I say desperate? Because many of these investors were happy to settle for 3 or 4% yields.
To my mind there is not so much competition that you should need to take such low yields… in some cases this means that the properties they bought would have ended up negative or break-even at best.
The properties they bought included a hungry jacks in Innisfail, A Dan Murphy's in Queanbeyan and a Bunnings in Swan Hill amongst others.
Those with the money to buy properties like this are fighting over the handful of these big name properties and settling for slimmer returns to get them.
Yet the same money could have gotten you an entire shopping complex in a regional town with multiple income sources and plenty of upside potential.
Some of the properties sold in this auction did make it up to 6.9% that is OK I guess, but many were much lower than that.
Compare this to our shopping center example where you could have several shops all producing 9% or 10% or more for the same money.
Burgess Rawson Director Shaun Venables says that clearance rates were at 85% that shows how keep investors are to get their hands on this kind of commercial properties.
To me, this smacks of badly educated residential investors who have the mindset that commercial property means a big shed or big name mentality.
They think that, since they've made a heap of money they can now afford to go out and buy a 10 million dollar Bunnings store without realising that the same money could double their returns by choosing property with higher yields and more upsides.
This only goes to prove what I have said time and again. Commercial property is not the same beast as residential and requires a very different mindset and education than any other type of investing.
In one way, that are doing the right thing. Many regional areas are booming and growing. They represent great stable returns for a lower investment. But the real opportunities are far richer and far-reaching than just buying a big shed with a blue chip lease…
You just need to change the way you think about property and know your numbers and tricks of the trade first.
Media reports that the gap between metro and regional yields are closing and when you are only looking at properties like those sold in this auction, you'd think that were true.
The real truth is that you can get a property with 9% yield in regional… but it's also possible to get the same from a metro property if you choose right.
Clearly the media are as ill informed as some of these investors who obviously have more money than sense.
Can you imagine buying a business that had no more scope for growth? You probably wouldn't right?
It's the same thing when you buy one of these properties with no upside potential.
Knowing that there are things you can do to a property to grow your income or the capital value is critical to a commercial property investment unless the lease is so good that it's a complete no-brainer to buy it.
Whether it's adding another rentable door, or adding another building, or an ATM there are many other possible ways of expanding your income on a property.
Every time you add something like this you also increase your rental income and also the value of the property when you get it revalued.
I cover many of these ways in my course so if you want to know how to do commercial property right – check out my webinar.