The global hunt for better yields continues and more na more people are diving into commercial property. An article on AFR this week called commercial property prices “frightening” .
And in may ways it’s true.
Yields have not been this tight since before the global financial crisis and with all the media hype and more relaxed international investment boundaries money is pouring into Australia looking for the best return.
At the moment the best stable return is in commercial property.
It makes you wonder whether it’s not the best time to start investing in commercial… and if you’re wondering that then this read is for you.
The money that’s pouring in… the investments and sales that the media is talking about all falls into much the same category…
Think of it like this.
Huge eagles are circling over head… they are circling a large heard of antelope looking for the low hanging fruit… losing for the easiest returns.
Then when they see their opportunity they swoop down and pick off the weak and injured…
That gives them the best returns for the least amount of effort.
But here’s the thing… these investors… the ones the media is always on about… they are the big boys… the biggest players in the market.
If you are wondering whether this is a good time to get into the commercial market, then what you are asking (in terms of this story) is this:
Are the hunting patterns of the eagles and the migratory patterns of the antelope going to affect the juicy morsels the sparrows are picking at?
Of course not right?
The eagles couldn’t care less about the tiny bits the sparrows and other small birds are feeding on…
As much as my ego would love to think that I’m one of the big players… of course I’m not. You and I are the sparrows.
The small deals, the shops with apartments upstairs, the small strata’d offices, the industrial units… the eagles don’t even see them.
Not only do they not even see them, but they would have no idea how to spot an upside if it was staring them in the face. Do you think an eagle is going to know, or even care about the difference between a worm and a slightly fatter, juicier worm?
No, not really… the distinction would mean nothing to them.
…And that’s how it in in the commercial market that I teach people to operate in. We are the small players.
The difference between a skinny worm and a juicy fat one can mean a lot to us.
…It’s the difference between say a 6% return and a 10% return.
And those kind of deals are still out there… all over the place. You just have to know how to spot them and how to tell the difference between them.
The string this metaphor along a bit more I could even go as far as to say that the more eagles do pick off the best investments the greater affect it can have on the smaller returns.
Those larger investments can stimulate development and infrastructure spending. It can cause areas to grow and new areas of growth to pop up…
And like those birds that you always see standing on the back of rhino’s on the national geographic channel, it means that new growth, changing local zoning rules can make way for new commercial properties to spring up.
You can piggyback a lift on the back of that Rhino all the way to the bank…
All that media hype of course is drawing more residential players into the commercial market but it’s still a tiny market with very low competition compared to the usual resi-investment market.
More important than that, the yields are dropping at the moment, but they are still better than what you get in the residential market.
The other thing have to keep in mind is that your opportunity to negotiate is much higher. I had a student present a property they were looking at and wanted to know if it was worth buying.
I told them…” not at that price” -it was way below what I’d normally look at, but, “who says it’s actually worth that?”
I got them to go back and get more information from the agent, ask some laser focused questions and do some more research. The upshot of all that extra work was that it looked like the property was actually worth about $70k less than was being asked.
Given how commercial property is all about the numbers you’d think that vendors who are clearly trying to get way more for their property than it’s actually worth might be more of a residential… emotional attachment thing…
Over pricing in the commercial market is so transparent… but the reality is that most people just don’t understand the numbers and let themselves get ripped off.
Once you understand how to get the correct value for a property then you can make offers that actually make sense… and get yourself a better deal.
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