On this week’s Valmika Property Investing blog we delve into advanced topics geared towards experienced investors in Australia, focusing on commercial property valuation, exit strategies, and property management.
Part 1: Unveiling commercial property valuation techniques.
Accurately valuing a commercial property is crucial for making informed investment decisions.
Here, we explore three common valuation methods:
- Income Capitalisation Approach: This method estimates a property’s value based on the income it generates. The key metric is the capitalisation rate (cap rate), which is the rate of return on investment an investor can expect.Example: Let’s say you’re considering a retail space with a net operating income (NOI) of $150,000 per year. Based on market research, the typical cap rate for similar properties in the area is 7%. Using the income capitalisation approach, the estimated value of the property would be $2,142,857 ($150,000 NOI / 7% cap rate).
- Sales Comparison Approach: This method compares the subject property to recently sold similar properties in the area. Factors like size, location, and property type are considered when making comparisons.
- Cost Approach: This approach estimates the value of a property by considering the cost to replace it. The cost of land, construction materials, and depreciation are factored in. This method is often used for new properties or those with limited rental history.
Part 2: Planning your exit – exploring strategies for leaving the market.
Knowing when and how to exit your investment is just as important as entering it.
Here are some common exit strategies for commercial property investors in Australia:
- Selling the property outright: This is the most straightforward exit strategy. Market conditions and property value appreciation will determine the profitability of this approach.
- Completing a development project: For some investors, acquiring a property for redevelopment might be the exit strategy. This strategy requires significant expertise, construction knowledge, and the ability to manage risk associated with development projects.
- Selling to a Real Estate Investment Trust (REIT): REITs often acquire income-producing commercial properties. This can be an exit option for investors seeking liquidity.
Part 3: Delegating the day-to-day: The role of property management in Australia.
Many investors choose to hire professional property management firms to handle the day-to-day operations of their commercial properties. Property managers perform various tasks, including:
- Tenant management: Finding and screening tenants, collecting rent, and enforcing lease agreements.
- Property maintenance: Overseeing repairs and ensuring the property is maintained in good condition.
- Financial reporting: Providing regular financial reports to the investor on income and expenses.
Choosing a property management firm:
- Experience & track record: Look for a firm with experience managing similar property types in your area.
- Fees & services: Clearly understand the fees charged and the services included in the management agreement. Property management fees in Australia typically range between 4% and 12% of the gross rental income (GRI), with the average fee around 7% depending on the size and type of property, location, and the scope of services offered.
Here’s a breakdown of the fee structure:
Lower end of the range (4-6%): Often applies to larger portfolios or long-term contracts with the property management firm
Higher end of the range (8-12%): Typically applies to smaller properties or those requiring more intensive management services (e.g., high-tenant turnover, complex properties).
- Communication style: Ensure clear communication and a good working relationship with the property management firm.
By understanding these advanced strategies, you can make informed decisions throughout the entire lifecycle of your commercial property investment, from valuation and acquisition to exiting the market and managing the property in the meantime.
Do you have questions about commercial property valuation, exit strategies, or property management in Australia? Reach out to us.
Stay tuned for upcoming blogs where we’ll delve deeper into specific commercial property types and investment opportunities!