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How to evaluate a commercial real estate investment

BMT team — Wed, 24 Feb 2021 00:13:21 +0000

There are additional factors to take into account when evaluating the viability of commercial real estate investment versus residential. On top of the usual considerations, commercial property investors need to explore the macroeconomic elements that will impact the success of their investment and the industry it operates in. With this in mind, have you ever wondered how to evaluate a commercial real estate investment? In this article, we will cover: What is commercial real estate 5 tips to evaluating a commercial real estate investment What is commercial real estate? Let’s start simple. Commercial real estate comes in different forms – from agricultural facilities, retail stores, to office buildings and hospitality venues. Commercial real estate is property used to operate a business. The Australian commercial real estate industry holds a large footprint. According to CoreLogic’s latest data, commercial real estate makes up $1 trillion of Australia’s wealth. How to evaluate a commercial real estate investment Evaluating any type of investment property will include carrying out due dilligence which essentially means crunching the numbers. This includes factors like rental income and yield, demand vs supply, financing requirements, how the purchase will impact your cash flow and much more. These are all extremely relevant when evaluating a commercial real estate investment. You will also need to think outside the box and evaluate factors that will impact the success of the property. If you’re looking to purchase a commercial real estate investment, we have broken down these factors to five parts. 1. Know the property’s history If the property is already established and has been used as an investment in previous years, you’re fortunate to have plenty of information and data points. Go through the property’s history and determine how it performed for the previous owners. Some of this information will be confidential but a good indicator is the percentage of time the property was tenanted. This is important to know in the early stages as the higher the percentage the more likely it is to be a solid investment choice. 2. Research the current property market throughout your evaluation What is the commercial property market doing in the area you are looking to buy? The market can be volatile, and while you’re not expected to predict the future, a baseline knowledge is still essential. This means conducting activities like a year-on-year market analysis, evaluating the increase or decrease of rental rates, looking into overall market trends and projected growth in the industry. You can really drill down in this analysis and note things like if there is a new commercial estate opening up nearby that may take prospective tenants wanting new facilities. 3. Track industry trends Unlike residential property, commercial property is significantly differentiated throughout the industry it operates within. In addition to the property market in general, you need to know this industry like the back of your hand. The industry demand is a determining factor of attracting tenants. For example, the warehouse industry is currently in high demand and it looks like it is just getting bigger with consumer preferences moving online. Recent forecasts have suggested that online sales will grow by $12.8 billion in 2021, which would result in a demand of about one million square metres of warehouse demand due to e-commerce activities alone. Data points such as this are a good reference when evaluating a commercial investment. 4. Identify the tenant market and weigh up with supply vs demand How niche or broad is the property’s tenant market? An office space or hospitality venue are examples of properties that would have a broad tenant market. While a poultry farming facility or medical practice are examples of properties with niche tenant markets. Should you be targeting a broad or niche tenant market? The answer to this isn’t straight forward. What you should be evaluating is how the tenant market’s demand weighs up against property supply. Holding a property that’s in high-demand and not in an over-saturated market should be the goal. Anything else can impact the property’s success and how much power you may have in lease negotiations. 5. Estimating the likely depreciation available Property depreciation is the natural wear and tear of a property and its assets over time. You don’t need to spend any money to claim depreciation, so it’s the only ‘non-cash’ deduction available from the property. Depreciation can often be the difference between a positive and negative cash flow. Therefore, it’s essential to include it as part of your initial evaluation of the property. BMT Tax Deprecation is here to help with your commercial real estate evaluation. The team can provide obligation-free preliminary estimates on all types of commercial properties. To learn more, visit BMT’s commercial page or Request a Quote.

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What’s happening in the commercial property market

BMT team — Tue, 22 Oct 2019 22:24:48 +0000

Most of the published information about commercial real estate relates to the highly visible ‘prime’ end of the market, but sometimes this gives a distorted view of the market. It’s important to consult trusted real estate agents to reveal the data associated with the less examined small and medium size market. Commercial real estate agents closely monitor market activity, as well as legislative changes and expert analysis to track responses to market conditions, like fluctuation in rental prices. The rent a property can command closely determines the value of commercial real estate, much more than with residential properties. Here’s a glimpse, from the perspective of rental asking prices at what’s happening and why in the Australian commercial real estate market. National market overview Major markets Office, Retail and Industrial National market overview The Australian commercial property market is made up of three major city markets – Melbourne, Sydney and Brisbane. These cities account for the lion’s share of the national commercial real estate industry. In the current market, there’s no shortage of events influencing sentiment towards commercial real estate. The three major metropolitan markets act in unison, responding and reacting in real-time to many local, national and international events as they hit the news. Commercial real estate has experienced cyclical highs and lows, lasting two years between property highs. National asking rent increases peaked in early 2017 at very high levels then trended downwards through to May this year when price increases have again shown signs of increasing in recent months. Major markets Sydney has experienced several peaks and troughs throughout the past few years. These cycles have lasted approximately 10 to 14 months between peaks. While Sydney’s commercial real estate rent rises sailed through previous national elections unfazed, this year was different. Sydney office rents dropped prior to the federal election and have since shown a rise in the months following. Melbourne and Brisbane are not synchronised with Sydney. Melbourne rent increases followed with a slow and graceful decline. However, there has been an upswing in lease prices since the middle of 2018. While Brisbane rents have managed only increases of 1 per cent every three months at best. Office, Retail and Industrial Office asking rent increases have been in what stockbrokers would call a ‘trading range’ for many years, starting in January 2017 with a slow declining peak over each of the last three successive cycles. Recently, there have been signs of a breakout from the trading range. Retail rents paint an interesting picture. The retail market was on the decline for quite some time. Since July 2018, retail rents have shown an increase, despite the gloom portrayed by some of the media. In comparison, the industrial property market has been travelling well and has enjoyed reasonably stable rent growth over the last five years. Commercial real estate properties are valued based on the revenue they can generate. The change in rent not only affects what the tenant pays, but also the value of the landlord’s asset. To keep updated on the commercial property outlook, check out Commercial Property Guide’s Asking Price Index. The Index brings together hundreds of commercial real estate agent opinions about the future direction of commercial real estate price movements. It measures the change in sentiment of experienced and expert agents on the future direction of commercial property prices. Article by Commercial Property Guide

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Could solar farms be the nation’s preferred future energy source?

BMT team — Tue, 24 Sep 2019 22:40:14 +0000

People across the globe are becoming more aware of the environmental impacts of fossil fuels, as conversation surrounding climate change continues. As a part of the climate change conversation several commentators have cited Australia’s untapped renewable energy industry and our potential to produce mass energy from sources like solar, wind and hydro. According to the Australian Energy Statistics report, renewable fuels accounted for 49,339 GWh of energy in 2018, a 25 per cent increase from 2017. Non-renewable fuels accounted for 212,066 GWh, a 3.4 per cent decline compared to 2017. While non-renewables generate the vast majority of our power, data indicates renewable fuels are accounting for a larger portion of supply year-on-year, while non-renewables are slowly declining. Of all renewables, hydroelectricity is the largest energy source, followed closely by wind power. However, research from The Australian Institute suggests solar power is the nation’s preferred future energy source. Solar energy is typically generated by solar farms. A solar farm is a large scale installation where photovoltaic panels, referred to as solar panels, are used to harvest the sun’s power. Solar power accounts for just 0.3 per cent of our power generation (Australian Bureau of Statistics), despite Australia having some of the best conditions in the world for producing solar energy. As the cost of gas begins to rise, experts predict solar will become an increasingly competitive and valuable energy source. It’s estimated that solar thermal energy could produce up to 60 per cent of Australia’s on grid electricity which would dramatically reduce our emissions. As advances in technology and reductions in cost give rise to solar energy, it’s important for energy suppliers to understand their tax entitlements. Depreciation is one aspect of taxation that facilitates greater investment in renewable energy projects like solar farms and ultimately lowers costs for consumers. Case study: solar farm depreciation The owner of a commercial solar farm is eligible to claim significant depreciation deductions on assets like photovoltaic electricity generating system assets, power transformers, fire indicator panels and security systems. The following table lists examples of plant and equipment assets found at the solar farm and highlights each asset’s original value at purchase. It also shows the first year and cumulative five year deductions available for each asset. The list of plant and equipment assets is not exhaustive and it’s likely there are several more assets of substantial depreciable worth to be deducted. As the table shows, the owner of the solar farm is entitled to claim almost $11 million dollars in depreciation deductions in the first financial year alone. When looking at the cumulative five years, this figure rises to almost $45 million. The owner will be able to claim many more millions over the lifetime of the solar farm. The money saved through depreciation could be useful when considering further investment or development for the commercial operation. A tax depreciation schedule is the best way to ensure you claim maximum deductions and get the biggest tax refund possible. A BMT Tax Depreciation Schedule covers all deductions available over the lifetime of a property and is 100 per cent tax deductible. To learn more about property depreciation, Request a Quote or contact the expert team at BMT on 1300 728 726.

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Commercial office update

BMT team — Tue, 26 Feb 2019 21:58:37 +0000

As summer draws to a close and people have returned to work, we’ve taken a look at what’s happening with the commercial office sector across Australia. Office vacancies rates The Property Council of Australia (PCA) February release of the 2019 Office Market Update, reports that office vacancies have tightened in metropolitan cities across Australia, with Sydney and Melbourne now at incredibly low levels. Overall, Australian office vacancy fell by 0.7 per cent in the six months to January 2019 to 8.5 per cent. The tightest markets are the Melbourne CBD, where the vacancy rate fell to 3.2 per cent (down from 3.6 per cent) and the Sydney CBD, which dropped to 4.1 per cent (down from 4.6 per cent). They were accompanied by falls in all capital cities other than Hobart. The PCA report states that both markets have strong economic fundamentals. However, the Melbourne CBD has seen strong supply of new office space and demand for that space. In the Sydney CBD the combination of a net withdrawal of office space and a tight market has left demand nowhere to grow. An additional 98,758 square metre of supply was added to the Melbourne CBD over the last six months compared to a 28,212 square metre increase in Sydney CBD. Predictions indicate, Melbourne will account for half of the additional one million square metres of office space coming onto the Australia’s CBD markets over the next three years. With the exception of Hobart, across the rest of Australia there has been a decrease in office vacancy rates in all capital city markets: Hobart 5.9 per cent (previously 5.8 per cent) Canberra 11 per cent (down from 12.4 per cent) Brisbane 13 per cent (down from 14.7 per cent) Adelaide 14.2 per cent (previously 14.7 per cent) Darwin 17.2 per cent (down from 21.6 per cent) Perth 18.5 per cent (down from 19.4 per cent) Net tenant demand has increased in both CBD and non-CBD markets, with positive demand in CBD markets for the ninth consecutive period. The national CBD office market vacancy rate fell to 8.3 per cent (down from 9.1 per cent in the previous period) which is its lowest level since January 2013. The office market vacancy rate in non-CBD markets also fell slightly to 9.1 per cent (down from 9.2 per cent in the previous period). New South Wales and Victoria had the top ten best performing non-CBD markets: Parramatta, East Melbourne, Macquarie Park, Crows Nest/St Leonards, Chatswood, St Kilda Road, North Sydney, Newcastle, Wollongong and Southbank, whilst the Sunshine Coast, West Perth and Brisbane Fringe have the highest non-CBD vacancy. Net absorption was 159,092 square metres during the six months to January 2019, which is on par with the historical average of 158,614 square metres. 243,436 square meters of office space was added during the six months to January 2019. The PCA ‘Office Market Update’ highlights almost one million square metres of office space will be added to Australian CBD markets over the next three years, with half of this new space being supplied to the Melbourne market, which will grow by more than 10 per cent of its current stock. The Sydney CBD will see an extra 4 per cent of current stock added through to 2021, followed by Brisbane CBD (4.4 per cent), Canberra (3.2 per cent) and Adelaide (5.1 per cent).

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