When it pays to wait + Agent commissions falling + No guts no gain

When it pays to wait + Agent commissions falling + No guts no gain

Highlights from this week:

  • Passed-in properties sell at a premium
  • Sellers drive a hard bargain with agents
  • The property grass is not always greener
  • Gut instincts backed up by research
  • Mindset adjustment required for commercial investment

Transcript:

Passed-in properties sell at a premium – Justin Nickerson

Kevin:  As we have mentioned on a few occasions, an auction campaign is more than just the auction day. There’s the lead up to the auction, and there’s also, more importantly, as we’re now discovering, after auction because there’s some recent research that’s been released by Gavl.com that reveals that passed-in properties are selling quite well. Joining me to talk about this, Justin Nickerson who is a spokesperson for Gavl.

G’day, Justin. Good to have you back on the show.

Justin:  Hey. Thanks, Kevin. How are you doing?

Kevin:  Yes, good. I guess this is no real surprise to you but it certainly was to me that properties are selling quite well and above their post-auction pass-in price.

Justin:  Yes, I think sometimes there is an expectation from buyers in particular that the pass-in price sets the ceiling and then they use that figure to renegotiate it down with the seller. But the reality is that sometimes with auctions, the price that gets passed in is the figure where the cash bidding has stopped. But then as you know, sometimes the auction starts after the auction, and people with terms and conditions can then get involved in negotiation after the auction – and that can quite often drive the price up.

Kevin:  I think the research revealed that it was selling for about $42,000 more than post-auction. What number of properties are actually selling after auction?

Justin:  That clearance rates hovers a little bit depending on what area you are and what location. But particularly in the South East Queensland corner, it can be as high as almost 30% of properties that sell within 10 to 14 days after the auction. I would suggest in Sydney and Melbourne, that’s probably slightly less than that because their clearance rates inside the first 30 days would be higher, but it would probably still be a substantial amount, probably 15% to 20%.

I think it’s just a reflection that sometimes that auction being a three-stage process is that third stage is the one that it does end up transacting in.

Kevin:  Agents, of course, know this. I think the research revealed that only 3% say that properties sell for less after auction, so the evidence is clearly there, Justin, isn’t it?

Justin:  Yes, it is definitely. And I think agents are really key in understanding the fact that sometimes the cash interest is there but it’s not a representation of the full market interest and it does need to go to that next stage to try and get a little bit more money for the seller.

Kevin:  I think there’s a lesson here for agents, too, and I just might expand on this a little bit. And that is that the agents tend to play up the option of selling on the day of auction. I know there’s still a very high reliance on that happening, but do you think if vendors were aware of the fact that their property may sell for more after auction, they wouldn’t be so disenchanted or disillusioned if it passes in, Justin?

Justin:  Yes, potentially. And I think there are good agents who are out there who really embrace and say “Hey look, it can happen prior to the auction, it can happen on the day, or it can happen post-auction.” And in reality, there are three different stages and opportunities that you have to sell the property.

We, by instinct, tend to really build up that middle stage, auction day being the big deal and end-all and the pinnacle. But the reality is that’s just a step in that three-stage process. So, what we want to be getting across to our sellers is “Look, we do want to try and sell it under the auction conditions if we can because that’s going to give you the best possible terms, which is important. But if that doesn’t happen, then certainly, it’s not all toys out of the cot.

“That third stage, we can look to engage with someone who might need terms and conditions or someone who might have seen the property late or waiting for a bit of a price indication, and then that could be the next stage where we can get it done.”

Kevin:  We’re probably seeing that more and more, too, with the introduction of services like Gavl, which is where more and more people are able to be at the auction, albeit virtually. That’s probably opened up the opportunity for more negotiation after auction because they won’t have registered a bid prior to auction, Justin.

Justin:  Yes, and also I think the beauty of that Gavl tool also does give a bit more transparency to people who maybe can’t attend the auction or might be post-auction buyers. They can watch the auction and they can get a really good feel for what their next move is going to be strategically to try and get the property after.

Kevin:  What’s involved with someone bidding at an auction remotely by using Gavl?

Justin:  It’s a really simple process, actually. The registration process is similar to that of the usual registration process. The only difference being they do fill out an authority to bid form or an authority that allows them to bid remotely. And then actually their bids are relayed through the app as if they were a live bidder there on the day, and then that obviously gets relayed to the auctioneer.

They do try and make it as seamless and as easy as possible because they want to make sure that anyone who is looking at bidding remotely isn’t at a disadvantage to anyone who might be sitting inside the lounge room or out in the back garden.

Kevin:  Just in terms of a technicality, someone bidding online with Gavl, if they are successful, who actually signs the contract on their behalf? How does that happen?

Justin:  Commonly, it’s the auctioneer. In most of the states in Australia, the auctioneer has the authority to sign on behalf of the buyer or the seller as part of the auction terms and conditions. It is a standard allowed process that that can happen. That’s the easiest solution, and generally, the auctioneer will sign on that buyer’s behalf and then the property is deemed to be sold and the transaction heads forward.

Kevin:  Does it need to be further endorsed after that? I know that it’s a formed contract at that stage, but are there any technicalities to say that the purchaser at some stage has to sign off?

Justin:  No, there isn’t. It gets sent to their solicitor, which is part of the usual process that takes place but it’s deemed when the property actually is sold, so when that final bid and the property is knocked down, that’s actually when the contract is formed. So nothing more is needed beyond that point.

So from the seller’s point of view particularly, they have peace of mind, but also from the buyer’s point of view, peace of mind as well that they bought the property and nothing is going to upset that.

Kevin:  Busy weekend ahead for you, mate, is it with auctions?

Justin:  It is, yes. We have quite a few on this weekend. We’re pushing towards the spring showing season that everyone looks forward to. And September is going to be a big one as well. We were a little bit quieter through June and July, but certainly, August and September, [6:28 inaudible] and plenty of auctions in front of us.

Kevin:  Are you anticipating that the auction activity is going to increase during August running into September?

Justin:  Historically, it always does. Historically, September is usually our largest month of volume for the year. I don’t see any reason that it’s going to be different this month. And August is a bit of a prelude to that. The vendors who are a little bit clever and try and beat the rest of the competition in the market usually come to the market in August, and then we have the big rush in September.

Kevin:  Justin Nickerson, my guest. Justin is the Gavl spokesperson, also a multi-award-winning auctioneer. Justin Nickerson, thank you so much for your time.

Justin:  My pleasure, Kevin. Thanks so much.

Sellers drive a hard bargain with agents – Matt McCann

Kevin:  Real estate agent commission rates on the eastern seaboard have fallen or remained fairly flat over the last 12 months according to Local Agent Finder. Joining me from Local Agent Finder is Matt McCann.

Matt, what do you put this down to?

Matt:  It’s an interesting set of numbers for us. This is the second time we’ve run this report, so it’s the first time we have comparable data. It’s across 5000 agents, so it’s a really large spread of data.

What we’re seeing in the eastern seaboard particularly is that commission rates are starting to come under pressure. We’re not seeing increases. We’re absolutely not seeing increases. And when you start to think about New South Wales being slightly down, Victoria being flat, and Queensland being slightly down, you’re starting to see what we think is the implication of having fewer transactions in the market.

Kevin:  Part of the study showed that Australia’s highest average commission rate was coming out of Tasmania, 2.96%. It almost seems to me to be a bit of an oxymoron. More buyers… That’s one of the most popular paths of Australian real estate right now. More buyer demand you would think would make it easier to sell.

Do you think sellers are prepared to pay a higher commission to make sure they’re actually getting top dollar?

Matt:  I think there’s something in quality and commission rates and the way we think about commission rates, particularly as being gating items. We see that day to day in our service where if someone is too low in terms of what they’re charging in their commission rate, then we know that there’s a question mark over their quality. If they’re too high and price themselves out, then they don’t make the consideration set. Quality factors are things that most vendors will go to once they’ve understood where the pricing fits, so it’s getting through the gate.

The piece about Tasmania is interesting, and it could just be that property prices have got ahead of where agents’ commissions have adjusted. So, people have got used to basically paying near that 3% commission rate.

With property values going up, as the market matures, we would probably expect to see those commission rates to come down, start to normalize nearer a normal level, say, of mainland commissions certainly on the eastern seaboard, which are much closer to 2% rather than that nearly 3%.

Kevin:  You’re talking about lower transaction volumes compared to a year ago has seemingly started to put pressure on agent commission rates. So, I’d question whether we’re looking for better agents and not necessarily cheaper ones, Matt.

Matt:  We’d absolutely agree with that, and part of the reason Local Agents Finder exists in this universe is to help people find those better agents and we use the quality markers. I think, generally though, for anyone going into a transaction at the moment, where there are question marks over the value you’ll get at the other side is always going to question the cost inputs.

I think that’s always going to be part of the equation, which is to say “Am I really understanding those things much better because there might be a chance that I don’t make as much as I thought I might make on exiting either an investment property or a home?” just because we are seeing values dip, again, a bit more extremely but particularly in the eastern seaboard.

I think that’s normal, but the real question will be the 12 months from now. If commissions have come under significant pressure and they’ve come down a long way, that’ll be showing us a really interesting trend that generally across the market, consumers think they can negotiate a lower commission. We don’t think the data supports that just today.

Kevin:  I guess there’s always a danger that people are going to judge an agent based purely on their commission. There are more important factors for them to take into consideration. Did your study reveal anything along those lines?

Matt:  It did, and our two years’ worth of detailed consumer research around the behavior of vendors in selling their property and what they look at, the ultimate decision to shake hands with someone, put your name on a sale authority comes down to much less than about commission at the end.

It really is about quality markers, so it really is about how you think that agent is going to deliver for you and get you the ultimate outcome. Ultimately, the difference of 0.25% in the commission rate, it might be $5000 to $10,000 on a really big sale. But actually, if that agent is getting me $200,000 or $300,000 more on an exit value, then that’s not something you’re going to haggle over.

I think most people come into the process going “How do I find the agent that gets me the best outcome at the end?” and they look at those quality markers. They look at market history: “What have you sold in this area of a property type like ours?” And also, they’ll look at what people say about you and the experience, and clearly, that’s a core part of our service.

But commission rate is important because it’s who gets on the short list. It really is a good determinant in who is one of the three agents that ultimately you’re going to seriously consider and look at those quality markers?

Kevin:  How much of a determining factor is the skill of the agent as a negotiator to get a higher commission? Have you seen any evidence of anything like that, Matt?

Matt:  We have. If you rank the attributes of an agent that people want when we’ve done this ranking, negotiating best outcome comes in at three or four. Understanding the market, knowing how to structure a campaign and how to market a property are probably the first two most people consider.

But I think the interesting part about the negotiation piece is I think in markets where prices are going up, there’s a little bit less pressure on that. I think we’re about to see that become a perhaps a higher ranked propensity capability from an agent is now where we’re seeing valuations not always meet vendor expectation.

I think you’ll be looking much more to ensure you have someone who really you can expect the best price for you.

Kevin:  Great talking to you, Matt McCann from Local Agent Finder. Thanks for your time, Matt.

Matt:  No problem. Cheers.

The property grass is not always greener – Miriam Sandkuhler

Kevin:  Quite often, I talk to people who want to get into the property market, and they tell me that they’re waiting for the market to drop or slow down. And when you ask them why, they really can’t tell you.

I’ve often wondered about whether or not we can talk about the best time to buy a property. That’s the question I’m going to pose of Miriam Sandkuhler. Miriam is the CEO and buyer’s agent from Property Mavens.

G’day, Miriam.

Miriam:  Hi, Kevin. How are you?

Kevin:  Good. Do you cop that question as well?

Miriam:  Absolutely. In fact, interestingly enough, people use it sometimes as a way of making a commitment to actually get into the market and a way of procrastinating.

Kevin:  What amazes me sometimes is how many times they will actually look for reasons not to buy a property when they tell you that they want to buy one. That’s a classic.

Miriam:  It absolutely is, and that could be based on fear, that could be based on being ill-informed, that could be based on just a habit of procrastinating. So, there are often different reasons why people will use that as an excuse to not take action, but ultimately, in doing that, that’s a potential for it to cost them a lot of money.

Kevin:  I did say in the opening there that you asked them why they’re waiting and they can’t tell you, because there really is no evidence in some case that the market is going to slow. Sometimes it’s just anecdotal, or it could even be their parents – growing up from your parents saying, “Be careful. Don’t do this, don’t do that.” You become too weary.

Miriam:  Yes, and particularly culturally, depending on what cultural influences you have in your family. I know there are certain cultures who won’t buy property unless they pay cash, but the reality is that the market is escalating faster than people can save. Yes, there is a lot of programming in terms of upbringing that can affect people’s thinking as well.

Kevin:  How do you overcome that kind of procrastination, Miriam, when you come up against it? What do you say? What do you do?

Miriam:  I try and have a conversation with clients around it and I highlight and ask them to consider the possibility that is this what you’re doing? Is it an emotional consideration? Is it a form of procrastination? In reality, what is the genuine reason why you can’t buy straight away?

And then they start thinking about it, and a lot of people come to the conclusion that there’s actually really no reason. It might be that they need more information or they may need help or they’re concerned about where to buy and what to buy, and they just want that extra added support.

Kevin:  The grass always looks greener, too, doesn’t it? Quite often, not just on property but in life. I was only talking to my wife today about some very wealthy people who can afford to give money away to people who need it. We came to the realization that while that may sound great, it comes with a whole heap of other problems that we probably can’t even imagine right now. So, the grass is not always greener.

Miriam:  Absolutely. Again, the grass is greener is an excuse to not take action now. And when we spoke before about waiting for the market to drop, my recommendation is always when the bank will give you the money and when you find the right property, that’s the time to buy, because everything else is a punch or a gamble.

It’s a bit of a trading mentality of “Let’s wait for the bottom of the market.” But if you can’t pick it, you’ll never know when to buy, and if you assume the grass is always greener, then you’ll never make a decision to buy the perfect property in front of you because you will assume that there’s a better one coming along.

Kevin:  I think you always have to look at property as a long-term investment. I don’t think anyone can ever pick the bottom of the market – and there is no one market anyway, Miriam.

Miriam:  That’s exactly right. And again, most people don’t understand that. They buy into the myth of all property doubles every seven years, all property is a good investment, wait until the bottom of the market. There are so many myths in the marketplace that it does cause a lot of confusion for buyers.

Kevin:  And therein lies another problem, too. This is where a lot of people come unstuck. They think that everything is the same, all property is the same, all property is going to go up. It’s one of those myths. So, therefore, if I buy a property, I’m going to become wealthy. And boy, isn’t that a big mistake?

Miriam:  That is one of the biggest myths out there, and I’m going to be cheeky here and say that it’s been perpetuated by a lot of property spruikers and developers and selling agents who, quite frankly, want to sell the stock that they’ve got to sell you whether it’s right for you or not.

Kevin:  I’m helping a young couple at present who are in the media, and I was horrified to hear that they had purchased some short-stay accommodation in central New South Wales. These are quite intelligent people and they admitted that they were sucked in. They were hit by a spruiker and it sounded so good.

Miriam:  And it is. It’s a bit sale spiel, and there’s a whole lot of psychology and emotional language behind these selling presentations. I also call it edutainment. “Let’s educate you about property investment, but we’ll entertain you at the same time and we’ll do lots of smoke and mirrors and bamboozle you, and you’ll be a fool if you don’t come and buy one of these from us because, hey, it’s too good an opportunity to miss out on.”

And that’s the stuff that I’ve written about in my book Property Prosperity, to help people beware of the tricks and traps that brokers and developers throw into the marketplace to encourage unwitting people to buy poor-performing property.

Kevin:  That book, what’s it called again?

Miriam:  Property Prosperity: 7 Steps to Investing Like an Expert.

Kevin:  Where do we get that?

Miriam:  You can download it off Amazon, Kindle as well, Amazon.com.au. It’s only $3.99 on Kindle. You can buy it from my website, PropertyMavens.com.au, and I can autograph that for you or you can buy a hard copy through Amazon as well.

Kevin:  Wow, that’s fantastic. I’ll grab one of those. I haven’t read it, Miriam.

Miriam:  Aw, Kevin, how could you not have read it? I’m sure I sent you one.

Kevin:  Yes. Well, that would be fantastic. Thank you. Will you autograph it for me?

Miriam:  Absolutely.

Kevin:  Good on you, Miriam. Miriam Sandkuhler has been my guest. Miriam is the CEO and buyer’s agent from Property Mavens and a gifted author, I might add. We’ll review that in one of the future shows. Good on you, Miriam.

Miriam:  Thanks, Kevin.

No guts – no gain – Simon Pressley

Kevin:  Imagine, if you will, that two years ago, you had the opportunity to invest a relatively small amount of money in a property location that, well, no one was really talking about. In fact, most people were trying to talk it down. What would you do? Would you do it?

Well, Simon Pressley from Propertyology knows someone who did, and it’s a great success story that I wanted to share with you today.

G’day, Simon. How are you doing?

Simon:  Really well, Kevin. Thank you for the opportunity to share this amazing story.

Kevin:  It is an amazing story, and I think it’s one we can learn a lot from. Okay, walk us through it. Who was it?

Simon:  It’s a Sydney-based investor who reached out to us a couple of years ago. I’ll come back to what the actual results that this investor achieved, but how it was brought to our attention was just a couple of months ago, this same client contacted to us two years after we helped him buy, and he was in the middle of working with his broker to get a pre-approval in place so that he could invest with us again.

He contacted us with great excitement, and he said “I’m getting my pre-approval. The bank has revalued my property. We paid $395,000 for it. Two years later, it’s worth $540,000.” That’s an official bank valuation in only a two-year period, and this person has not spent a single cent on renovations or anything like that. That’s how we know it’s a factual valuation. We’re not talking about changing median values or anything like that.

But he also recalled that when he contacted us to invest two years earlier and we recommended a particular location, which was Hobart back then, it took some convincing because back then, Hobart was getting a lot of negative press and hadn’t done much for too long. And it’s fair to say he’s pretty grateful that he supported our recommendation.

Kevin:  Was there any hesitancy there from him when you suggested it?

Simon:  No, not hesitancy. I guess it was a surprise recommendation, but once we stepped him through what we knew about the market, why it performed poorly before, why we thought it was going to perform well in the future, it all made sense.

I guess the trouble is it’s very easy for members of the general public to get caught up in perception without actually focusing on the numbers. And the drivers. When we did that for this particular client, it all made sense. As I said, he certainly is very grateful that we brought Hobart back to his attention.

Kevin:  This is one of the difficulties I think a lot of investors have, Simon, and that is they need to take the emotion out of this, don’t they? You need to look at it as a business.

Simon:  You do need to look at it as a business. You need to get past whether you’d live there, whether you would or wouldn’t live there, because the objective of investing has nothing to do with that, of course.

It’s understanding what are the things that actually influence property prices and then looking at those things in isolation, stacking them up, and then forming a bit of a picture of how that might change in the coming years. Is it a good picture, or is it a not so good picture? When we did that with Hobart a few years back, it was a very exciting picture and that’s certainly how it’s unfolded.

This is also a great example of the power of leveraging. This particular property, Kevin, the purchase price was $395,000. The investor’s own deposit money, if you like, was $75,000, so that was their equity, not a huge sum. A bank loan of $320,000 obviously. But with what the property value has grown by, that equity has increased from $75,000 initially to $220,000 in just two years.

Now I’ve done the calculations for those listening to this interview. That’s a 290% increase in two years, from $75,000 to $220,000 in just two years. What would you have made if you put $75,000 in the bank for two years?

Kevin:  Yes, that’s the capital growth. Then, of course, you have the return on the investment, haven’t you? It’s returning money for you as well.

Simon:  That’s right. This is a really unique situation where Hobart has capital growth and extreme rental growth, so not only has his initial equity increased by 290% but the property is cash flow positive, so he’s getting the double benefit there. It’s putting money in his pocket each and every year, and the asset value is already grown significantly in just two years – and that market continues to grow.

Kevin:  I think I remember reading the blog article you wrote about this, and it’s getting a rental return now of almost $500 a week, isn’t it?

Simon:  Yes, that’s right. For an asset that was purchased for less than $400,000 and interest rates that look like remaining very, very low for many years yet, yes, it’s cash flow positive.

Kevin:  Hobart, of course, you’re the first person I know of to actually tip that market when everyone else was saying it’s not even worth looking at. Are there any more Hobarts on the horizon? I don’t expect you to name them, of course – that’s your IP – but are there any on the horizon?

Simon:  I would love to say there are dozens of them. There aren’t, in our professional opinion – and I hope we’re proven wrong – but there are a couple. There’s one market that we’re investing in at the moment that in the space of a few months, we’ve seen buyer competition go through the roof. We got in just at the start of the growth cycle, but I think we’ll be out of there by Christmas before it becomes public knowledge that this market is performing particularly well.

But yes, there are a few. And in any calendar year. there are always some. It just depends whether there are lots or just a couple. Here and now, there are just a couple we feel.

Kevin:  Are they regional markets?

Simon:  They are regional markets, yes. I can’t see any capital city in Australia producing double-digit price growth in the next year or two. Beyond that, anything is possible, of course. If it does happen, it’s going to be capital city markets that haven’t already been through a growth cycle.

So, in no particular order, it’s going to be the likes of Adelaide, Brisbane, Perth. Darwin has got too many troubles, I think. But those three capital cities, logic would suggest would be the most likely to have double-digit growth, but I’m not expecting it to happen in the near term.

Kevin:  If you’d like to know a little bit more, reach out and talk to the team at Propertyology. Reach them through the website, Propertyology.com.au, through our website, Real Estate Talk. That’ll take you there. Or you can ring them on 1-300-65-4070.

Simon Pressley, thanks for your time.

Simon:  Thanks, Kevin.

Mindset adjustment required for commercial investment – Simon Staddon

Kevin:  With the slowing down of the residential investment market, a growing number of traditional residential investors are shifting their focus to the stronger underlying real estate attributes and superior tenants on offer in commercial property investment, according to Simon Staddon of Burgess Rawson.

They are a full-service Australia-wide agency carrying out sales, valuations, leasing, and managing commercial and residential investment property, and featured, of course, in the latest edition of Your Investment Property magazine. Simon joins me.

Good morning, Simon.

Simon:  Yes, good morning, Kevin. How are you?

Kevin:  Simon, has price-parity had a lot to do with the increase in the number of investors who are turning to commercial property investment?

Simon:  Yes, I think it has, Kevin. It just continues on, I suppose, with Aussie’s love affair with real estate generally. I think it’s fair to say they do love real estate and particularly, residential. But I’m always going to be very biased; I’ve been in commercial property for a very long time and I can see commercial property has huge advantages as far as I’m concerned.

But price-parity, yes, it comes back to the residential median house price very often. If you look in Sydney, the median house price, let’s call it circa over $1 million, but there has been a slowing of the residential market as you just indicated.

And there’s no question that traditional residential investors are now… We’re seeing a lot of it because we monitor enquiry and everything else in our agency, and there’s a lot of people coming out of residential because they’re not quite sure where it’s going, and the commercial investment market is just kicking along. Low interest rates still, and it really is business as usual. It’s a very strong commercial investment market at the moment, and that’s exactly the area of the market that we are very much at the coalface of things.

Kevin:  I want to ask you about the differences between residential and commercial, which we’ll get into in just a moment. But before I do, are you seeing a number of people diversifying out of residential, keeping their residential but adding commercial to their portfolio, and vice versa, I guess?

Simon:  Yeah, absolutely. And there’s a logical step… I think if someone has been a traditional residential investor for a number of years – and we’ve seen this in our agency – I think the first logical step is sometimes into an asset class like childcare, because obviously, it brings in elements of residential but is also a commercial asset class in its own right. It’s a very, very popular asset class.

I look back to, say, 2010/11, yields on childcare investments were around 8% believe it or not in that timeframe. 2017/18 now, they’ve compressed to under 5%. That’s a huge difference, but it’s a very hot sector and it’s a very logical thing for traditional “ressie” investors to come into. It’s obviously not the only asset class, but it’s a stepping stone, if that makes sense.

Kevin:  How does investing in commercial property vary from investing in residential property, putting aside the mindset, which I’ll deal with in just a moment?

Simon:  Again, I’ll come back to that point, Kevin, that I’m a little bit biased with commercial property generally, but there are so many advantages in many ways to commercial property. A lot of residential investors don’t realize that very often, under the terms of a commercial lease, a tenant might actually pay all the outgoings, which would include council rates, land tax, insurance, and land taxes really surprises people on a single-holding basis.

But the advantages obviously are the quality of tenant. We sell a lot of brand-name investments, and obviously, with residential property, you’re dealing with moms and dads or whatever, but with commercial property, you can secure a very good tenant who will pretty much look after everything in terms of outgoings.

In terms of rental increases, we’ve just been instructed on a property in Darlinghurst, a retail investment, and that has 4% annual increases, which is really a huge advantage because the value of your commercial investment will go up by the increment of 4%. And obviously, as the rent goes up, it is just a question of what yield is and the value of the property. The capital value of the property goes up as well.

Kevin:  Yes, you get a different style of tenant, don’t you? You get more of a business tenant as opposed to a residential/family, emotional type tenant as well.

Can I take you in another direction because we’re running out of time here, Simon? But I just want to ask you, does it actually require an adjustment in mindset for the investor to move into this area?

Simon:  Yes, I think it does. I think a residential investor is very location-specific. They have a location-specific mindset. With commercial property, the primary drivers over residential can be such things as asset class, strength of tenant profile, and the length of the lease. The length of the lease is very, very important. If you get a Coles as a tenant and you have it on a brand-new 15-year lease, it’s set and forget. And that mindset is very different.

Investors will go in any location. We sell property all over Australia. It’s really a numbers game, and the location is not the primary driver very often. I can give you lots of examples on that on fast foods or whatever where we’re selling Coffs Harbour, a Guzman y Gomez at 4.5%. That’s not based on the location. It’s based on asset class, length of lease, depreciation, etc.

Kevin:  And those factors, in some way, are determined by location, though, aren’t they? I know what you’re saying; the value of the property is determined by the strength of the lease. But would I be correct in saying the strength of the lease is sometimes determined by the location if it’s a prime location for the commercial property? A Coles is an example.

Simon:  A Coles, yes. It’s one of those things when people come to ask, they are inquiring on a commercial property we’re selling, not because of where it is, because of the tenant and the length of the lease.

Kevin:  That’s right. I do understand that.

Simon:  That’s the primary driver, very often. Obviously, location is still important – of course, it is – but a lot of people in residential find that surprising.

Kevin:  Yes. The point I was making – and maybe I didn’t make it clearly enough – was that the tenant will always look for a good location, particularly if it’s a Coles.

Simon:  Of course.

Kevin:  Exactly.

Simon:  Fast foods: McDonald’s, they’ve done on a lot of due diligence on their site. Exactly. It gives investors the confidence. If McDonald’s have done their DD on the site, it’s good enough for me.

Kevin:  Good stuff. Simon has been my guest. Simon Staddon. Simon is from Burgess Rawson and is featured in the latest edition of Your Investment Property magazine.

Simon, thank you so much for your time. I appreciate it.

Simon:  No problem, Kevin. Thank you. My pleasure.

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Kevin Turner
kevin@realestatetalk.com.au
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