Strategies to maximise your commercial property value
As the national economic outlook continues to ebb and flow, it’s important to know the ways you can get the most out of your commercial properties.
In an episode of Inside Commercial Property, Rethink Investing director Scott O’Neill delved into the current state of the commercial property market, discussing with Smart Property Investment’s Phil Tarrant the strategies that property investors can utilise to maximise financial returns among volatile interest and inflation rates.
O’Neill stated that even with the challenges presented by the current economic climate, the key to safeguarding your commercial properties lies in keeping your ear to the proverbial ground of the commercial property sector and making informed investment decisions based on market conditions and asset class.
He detailed one of the optimal manifestations of this philosophy as identifying properties where you can add value through renovations that take minimal upfront investment.
“You’ll attract a better tenant if you prepare your vacant property better. It’s just going to attract a different level of tenant and you’ll fill it faster. You might get more rent for it,” stated O’Neill.
He explained that by applying this lens, you can already minimise risk through improving your tenancy mix and attracting tenants that desire a higher quality property to rent.
“Renovating is generally a pretty good play with your property, but always renovate for the tenant’s benefit. Otherwise you’re going to blow your dough.”
In following with this strategy, a property is then positioned in a light in which further return can be procured through favourably tuning the negotiating terms of a rental lease.
O’Neill recommended knowing the state of the market before undergoing negotiations with possible clients; being across details such as prices and other such characteristics for properties similar to your own.
“I was talking to the client throughout this [rental] process, and the tenant pushed back. Be ready for that conversation, have the spreadsheet showing all the comparables, and you can’t argue with that, and eventually they’ll meet the market,” O’Neill said.
Adjacent to this strategy, O’Neill also spoke of the benefits of maximising the market value of properties through aiming to lengthen leases with clients.
“So if you turn a one year lease into a 10-year lease, it’s obviously going to have an impact on the value, because the perceived value to investors is a greater secured asset.”
Seeking out clients who are able to agree to these longer leases can at first present more upfront work, but O’Neill still stridently spoke about the returns from such an arrangement.
“[A] tenant owes you more money, the bank will lend to you better, so you might get an advantage on your home loan. There’s a lot of benefits to a longer lease and over the years, I’ve kind of compared thousands of deals, what that actual lease does to your value.”
Another strategy involves approaching income generation from commercial property from a completely new angle. He advised exploring new ways to utilise properties that could become drastically more profitable.
Touting that investors can go through council processes to obtain extra footprint and free land on the property, O’Neill said “building can be very lucrative if you get the right asset and you’re not paying over for it”.
Depending on whether a building could be considered more functional when zoned for commercial or residential use, applying for a “change of use” is another option that O’Neill is a proponent of.
“If you apply for a change of use to council and depending on what the demands are of that local community, that could significantly change the value,” he remarked.
A lesser known value-creation tool is through reduction of energy costs. One way the commercial expert said this can be done is through utilising solar panels and even generating new streams of income through leasing roof space to solar panel companies.
“If you’ve got net leases where the tenants are paying everything, you are economically better off to lease your roof out to a third-party solar panel company, and they’ll pay you a percentage of their profit,” he revealed.
“They get their return on money in about four years on the asset, but then they’ll pay a lease, and normally the lease is 10 years and it’s like a standard lease. So it’s another income.”
O’Neill’s assortment of strategies for increasing financial return from commercial properties are proof that even amid a volatile economic climate, profitability from one’s properties is still very much achievable by savvy investors willing to “extract the equity”.
Listen to the full conversation with Scott O’Neill here.