Commercial asset types 101 - Property Inc

[ Podcast Transcription ]

Inside Commercial Property with Rethink Investing. Australia’s largest and most comprehensive podcast covering all things commercial investing. Great intro. That Phil Tarrant, co host Inside Commercial Property, Rethink Investing. I’m joined with my co host here, Scott O’Neill, director of Rethink Investing and commercial property guru.

Can I call you that yet? Oh, you probably don’t like that mantle, do you? Nah, oh, why not, mate? It’s just your style. And, um, I’ve enjoyed Scott just getting to know you over the last couple of years. And, and you sort of, you’re a steady set of hands. You don’t get No extremes. No extremes. Which is what I would expect from someone that does what you do for a living.

But you’re an engineer by background. So I think you’re very representative of an engineer. That’s a compliment. Yeah, yeah, yeah. Hey, B, what’s been happening? Ah, good mate. I was um, up in Queensland yesterday when they locked the borders on us. So, lucky it wasn’t on the spot. They gave us two or three days notice.

So, yeah, crazy world, but um, yeah, just getting out there, looking at lots of properties, talking to lots of people. It’s uh, interesting time to be alive. Yeah. Did you fly in an aeroplane, no doubt? Yeah, on there. It was packed. Was it? Yeah. No social distancing? No. Zero? No. Should we wear a mask? Yeah, they give it to you now.

Okay. So, and little hand sanitiser. There’s no… No drink services, it’s uh, airports look pretty gloomy to be honest. It’s uh, all the, like maybe one out of fifteen shops are open. But, it’s, it’s sort of nice in a way. Just, I don’t know if, you know, when you spend a lot of time on the plane, it, to get to a, you know, sit at the airport and not have to, you know, stand against the wall waiting for the line and all that stuff, because there’s too many people.

It’s pretty good. I haven’t flown. The last flight I had was back from Singapore, like late February, just before, and now they were smack bang in the middle of COVID there, and I was like, Oh, Armageddon’s coming, right? And, uh, that’s the last flight I’ve taken, but, uh, I think I’ll be back domestically at some point soon.

But anyway, that’s not what we’re here to chat about. We’re here to chat about commercial property and including commercial landing. One of my routines every morning, Scott, is that, uh, I walk up the hill from home and drink a couple of coffees on the way and I listen to all podcasts, et cetera. The first thing I do is that I read the, uh, financial review, uh, cover after I’ve read through all of the, the different assets and platforms we have here at Momentum Media, which is part of smart property investments.

I get a pretty. It’s a holistic and informed view of what’s going on at any given time and, and I do that part of it just because it’s process and that’s what I’ve done for ages, but also it’s how I sort of really keep connected with anything that’s going on. And I just want to chat with you before we get into episode three of Inside Commercial Property with Rethink Investing, just get a sense of the market right now.

So. We’re going to drill down in this episode into the sort of types of assets within the commercial landscape, the sort of tenant types connected with them. I want to get a bit of a insight on the asset dynamics when it comes to each of them, because they’re all behave in different ways. And then the cyclical nature of commercial property.

So sometimes some are hot, some are not the sort of economic inputs or economic influences. On the asset types, COVID 19 would be definitely something which has shaped all of these as well. And just really compare and contrast all these assets side by side with each other. And when is the right time to actually invest in these during the sort of property cycle?

So that’s a key focus for today, but I picked up the paper here. I’ve got it in front of me, the property section, a couple of headlines, vacancy rates to languish for longer says analysts. Office vacancy could rise as high as 15 percent in Sydney, Melbourne in the next three years as working from home becomes more widely accepted in the workplace culture.

That’s one headline we’ve got here today and a little bit of a synopsis. There’s another piece here and you can probably hear me flicking through the paper. Officers could save the suburban retail strip is another one. So this is an article Scott talking about. All those sort of high street suburban strips that you see that you might’ve had a, you know, a pizza hut in it or a news agent or, you know, a doctor’s surgery or whatever, they’re going to start turning them into mini little office strips for sort of 25 odd people.

So that’s a really interesting scenario. So it shows how commercial property is evolving over time. And there’s another one here that says commercial sales tank. As buyers wait. So you read this and you’d be, um, in isolation. You think you shouldn’t be in commercial right now, but this is really talking about the office market.

This is cyclical nature of it all. How would you describe the environment in commercial real estate right now? Is it doom and gloom or is it up and up? Uh, well, it’s mixed. So we’re finding I read an article in the fin review a few days ago saying that transaction levels are down by a third. But there’s the same number of investors looking to buy.

So we’re all fighting over less stock. So that’s due to interest rate drops, there’s a little bit less confidence in the share market as well as residential as well. So investors are here to invest for the income that commercial property gives you. Unfortunately, office, the office market is one of the casualties from COVID.

You know, we’re seeing vacancy rates rise. Like for example, Melbourne went from a 3. 4 percent vacancy rate to 7. 7 as a direct result of COVID lockdowns. It’s having a little bit of a recovery since, but it’s not looking too good down there. Sydney’s risen from 5. 8 percent to 7. 5 in that time. Adelaide’s been steady.

Canberra has actually dropped. So Canberra went from about 12 percent down to about 8%. So, tightening vacancy rates, believe it or not. Brisbane’s slightly increased, you know, that’s gone from about 11 percent to 12%. But yeah, it’s really Melbourne and Sydney that have had the sharpest decline. So, you know, at Rethink Investing, we don’t really buy much office space at all.

In fact, you know, it’s probably a one in a hundred occurrence when we do. So we don’t really look at it. We consider where the market’s doing better is, uh, the industrial space. That is, it’s got by far the best leasing market right now. There is, um, also tenants benefiting from lockdowns because retail has moved online more.

So there’s more, uh, demand for storage space, local manufacturing. could be one of the big winners out of the China, US, UK, you know, tensions, but you know, China against the Western world. So that might cause a bit of decentralization. That means we can’t import everything like we did. So local manufacturing might come back on.

Industrial space is one of the definitions is where you manufacture goods and store it. So if you make more here in Australia, industrial space might be more valuable. So. We target these areas because the outlook looks better. It’s not doom and gloom at all. It’s interest rates are incredibly low. You just got to pick the winners and avoid the, you know, the, like the stories you mentioned there.

They’re written to the extremes, focusing on very small focal points, but it’s not the general nature out there. There’s many businesses still doing well. We’ve just got to target those and this is so you need a real filter when you’re in the process of gathering information to make more informed Investing decisions in commercial just be careful where you get your fashion Don’t be skewed by some of the media bias that you might see and I guess that’s what we’re trying to Support people with by doing this particular podcast is to have good honest frank conversations around investing in in commercial property and there is Uh, Australia’s underweight in this sort of commentary and analysis.

It’s pretty heavy in the retail space, uh, residential space. There’s a lot of places you can get your information, but light on commercial property. So if you like what we’re chatting about, make sure you tell your friends who are investing in commercial. And these are the sort of conversations we’d like to have.

We’re still reasonably early on in this series of podcasts, this episode. Three. So we’re going to start getting some guests on at a point in time so we can talk about those real world stories and scenarios investing in commercial, but we’re still sort of foundationally helping a lot of our listeners understand the dynamics of commercial.

And that’s very much a thrust of, of this episode. So let’s chat through. Some of the different asset types, I guess you’ll call them that commercial being an asset class office retail industrial and specialties pretty sort of broad brushstrokes how we can delineate between the types of Commercial properties in a way in which you can start looking at collective market dynamics around them They all sort of operate in reasonable unison But a collective of offices collective of retail collective industrial collective specialty kicking off with the office market Scott to some of those stories there, you’d be thinking that you wouldn’t want to be getting into office, but already there’s people pivoting now changing, you know, retail high streets into sort of dynamic office space.

What are you seeing in offices right now and who are the sort of strong tenants in those particular areas? Yeah, so the office dynamics, uh, we’re seeing a weakness in the CBD space. For example, those, uh, you know, vacancy rates I just mentioned, they are increasing. However, there is a bit of a positive impact into suburban office space.

So, specifically professional service types. So, a professional service tenant might be You know, an accountant, a solicitor, an engineer, a financial planner, you could have mortgage brokers, you can have even like your old government type tenant stuff. Those are generally quite stable tenants because they’re not discretionary spend type businesses.

They still need a space to do their business. You know, a lot of them need to meet clients for trust factors, for branding reasons, you know, like they’ve got to have staff that don’t have the facilities to work at home. So You know, in most states, you know, besides Victoria, we’re back to work to a degree.

And those suburban areas are doing quite well. They’ve generally got higher car spot ratios and things like that as well, which means less reliance on public transport. They’re some of the reasons we’re seeing office space do quite well in those areas. So, yeah, two speed market. And, um, we find that those suburban type office spaces are cheaper per square meter.

Again, businesses might want to look to save money. You can, uh, pay, you know, half the square metre rate for somewhere closer to your home. Or, you know, it may not have the CBD brand to it anymore, but is that that important right now? I don’t think so. So, you know, that’s a strong part and, um, you know, there’s not a lot out there.

But look, accountants and lawyers and those types of tenants, they’re quite sticky as well. Once they, you know, land on those locations, they don’t really jump up. Just to save a little bit of rent to move somewhere else, you get them for the long term. So these are more localised businesses who may support the local market.

So real estate agents, for example, are really geographically located to the area. You don’t have a real estate agent operating in one area and they’re selling, you know, stuff 20, 30, 40, 50 kilometres away. They normally own and operate within that particular space. You said that you don’t do a lot of office and that might be a product of the cycle right now, and we’ll get into that in a moment, but when you go about assessing a office based investment opportunity, I imagine you would start at the type of tenants you would be attracted to.

So you want to make sure yours, you know, the asset would appeal to as many people as possible. What would be the other sort of four or five key indicators that you need to be looking for when considering office? Uh, so I like modern offices or boutique type ones, you know, might only be a three story building, you know, and they’ve got maybe a, you know, we bought one recently right next to a, a council and it was a surveying company and they’ve been there 20 years.

So that was a, you know, a good investment because, uh, it had the location it needed to be in established businesses. I find the tenants you can get with office are actually quite. professional in nature so that they’re really good to deal with in many cases. So, you know, they’re quite relatable as well.

If you’ve come from a business world and never invested, sometimes industrial might be too far. Retail can be a little bit more of the discretionary spend based stuff, which has more risk as well. So it’s about just assessing the, the tenant itself, the location, make sure there’s not too much supply. So one of the reasons why I find residential difficult to predict, everyone finds it difficult to predict, is it’s at the mercy of the market.

So no matter how much you think you know that market, it It runs almost like the share market to a degree, it’s sentiment based. And there’s obviously other indicators about, you know, how much people can pay, what’s going on with the interest rate. But, uh, when you look at a commercial property, you can look at the specific business in that specific market and go, look, have they got the ability to pay the rent that’s been promised to us?

And then you can check the bank statements to check they’ve been paying. And it just gives you a lot more confidence. And then you’ve got inbuilt increases in those leases. So you check, is it a three or 4 percent or a CPI? And, uh, you just got to form your own dialogue around that tenant and obviously your tenants in office space can come and go a little bit easier than someone with a, you know, a very expensive food kitchen type setup, you know, so that, you know, it’s packing laptops up.

So you’ve got to take that into account and, uh, you know, you just weigh out the tenant case by case and there isn’t much good stock out there, which is one of the reasons we’re not buying much of it. We probably would like to buy more of it. But, you know, it’s hard to, hard to find the ones that all stack up and we don’t really want to go into the CBD and play the, uh, you know, that to me is almost like a residential market.

You’re just one of thousands of other, you know, it’s like, you’re just playing the numbers, you know, what the floor space is worth is, that’s the going rate for that building. You know, there’s not much you can control there. And I, I don’t know your thoughts on this, but I’ll ask, is your sort of CBD office space more the bastion of your, your big institutional investors, your super funds and other, other type of funding vehicles and your suburban office is more sort of bastion of your mum and dad investors?

Is that what you see? Yeah, look, price is a big part of it. And if you do go in with a, you know, a mum and dad or retail level investor budget, say you’re sub two or three mil, you’re normally only getting a part of a floor of a CBD building. Mm. At least if you take two or three million, you know, I know it’s big budgets for some, but you might end up with a whole building in a regional area.

You might even get four or five tenants as part of that. So, you know, the regional institutional buyers will buy entire tower blocks and that can be hundreds of millions of dollars. So. You know, they control the whole asset. There’s benefits of that. You know, you can do value adds by increasing the whale, you know, the weighted average lease expiry on that and increasing the rent on it.

You might do renovations. So you’ve got a different level of control and that’s why the big guys play in that space a lot more. How worried are the big guys around sort of CBD or large metropolitan based office space right now? They must be pretty concerned. Yeah, I’d be worried, like, how would they find buyers at the moment, you know, I don’t think there’s many people that’d be looking to do big acquisitions in that space right now and the opposite is said in other industries, you know, so it is probably a wait and hold scenario for many of them and, uh, you know, like if, you know, let’s say a vaccine comes out at the end of the year or whenever it is, or if it ever does, you know, something like that would change the dynamic pretty quick.

I think it might take a few years for it. Things to settle down and you might need more population growth and like it could take a while for it to fully recover Yeah, that’s the reason why I steer clear of it most cases and office CBD stuff to your early point was City, Melbourne I guess the particular was was on a pretty good sort of upward trajectory Wasn’t it for a period of time there last 10 years?

Yeah, look, it’s, rents have gone up, uh, asset values have, you know, doubled and tripled in some examples, so it’s had an incredible 10 years, so it’s probably coming from a high point as well. Yields were getting very low, you know, you’re talking 4%, 3%, you know, for these types, you know, areas, and I think you need more than that.

Even Brisbane, you’re looking at, you know, 5. 5 percent to 6 percent for a really good building, and, you know, you can do better than that. So, yields did get quite tight. Yeah. And as we, if you’ve been tuning in to Inside Commercial Property for a little while, for Rethink Investing, you know, we try and keep the focus of this particular podcast, Scott, at that sort of retail investor level, not at the institutional level.

So, we sort of inverted commas, mom and dad investors, but this could be people investing thrive by their self managed super fund, whether it’s something that they choose to occupy themselves in business or, or just as an asset. and income creating vehicle, but also those investors pivoting out of, or addition to a residential investing who are looking to add some commercial assets to their portfolio.

And I sort of fall into that bracket. So, you know, I’d say more sophisticated investors on the retail side rather than institutional, but we just want to make sure that those who are embarking on their journey in investing in property. Don’t necessarily always gravitate towards residential being their first investment.

And we’ve spoken about that as well. I’m trying to open up some people’s eyes and maybe unshackle the blinkers and think outside of the paradigm that you may know about. So that’s the office market. And me personally, considering, you know, expanding out my portfolio into commercial, I probably wouldn’t chase.

Office at the moment for a whole bunch of those reasons you mentioned and that’s not to say there isn’t good assets out there but it’s more of a philosophy that you have within residential investing as well is that where is your money going to be the most effective at any given time to help you on whatever your strategy is and You know, therefore you need to shape how you approach things.

So in a residential market, some people might say, well, I’m not going to invest in Brisbane because of this particular bias, but that might be the best place to park your money now. So when you look at these other asset classes within commercial and let’s shift on to retail, retail’s distressed at the moment as well, because of the changing nature of how people are buying stuff.

Yeah, so, you know, and there’s different types of retail. So like large format retail, you know, that might be your homemaker centers and your, you know, targets and, you know, Bunnings and all those types of ones. There’s some areas that are doing really well and some that are not, you know, large, you know, to sort of show you, you know, a variety.

Retail can even be a gym tenant. It can be, you know, a sushi restaurant. It could be, you know, you could go on for an hour, but like there’s just, a thousand different types of businesses out there and it’s about picking the right one and retail is suffering at the moment especially where there’s a forced closure and that’s where you’ve got to sort of you know be mindful but look it’s a short term issue you know like we’ve seen the gyms for instance in uh many parts of Sydney and Brisbane and Perth where they had a terrible first quarter of the year but now they’re all back open and they’re you know making up for lost ground because people are still going to keep fit you know it’s not going to just die forever just because COVID’s here.

on these types of things. So it’s always good to have a long term picture and look at, you know, what could that space be used for if that current tenant didn’t leave? Retail has the benefit of, you know, you’ve got potentially higher value fit outs. Owners with businesses will put their money into it and that creates value on the lease.

So like a cafe might have a hundred thousand, 200, 000 fit out, which is going to be there even if that current tenant. Leaves, he’ll sell that business and there’ll be another cafe owner running it. So you can get that kind of interchange of owners. You know, that happens with hairdressers a lot as well, restaurants as well.

So they sell the goodwill of the business with the stock in it. And they basically try a rebranded and do their own thing. So that can be good as an investor. If you’ve got. new people coming in, you know, even if it’s not the same operator for the next 30 years, you might have two or three in that time.

So, you know, retail is still good, but you’ve got to be careful with the changing landscape, which is, is it going to keep growing as fast as the rents have been growing over the last 30 years? You know, probably not, you know, there’s enough kind of headwinds out there and the online world is the difference.

Things are moving online because it’s cheaper for, you know, your average retailer to market themselves on the internet than pay rents, especially when they’ve got multiple footprints. You know, imagine you’ve got 50 stores across the country, that’s 50 times the rent you’ve got, like it’s a huge amount of outgoings you’ve got to cover.

So I’ve heard there’s stories in COVID of a lot of famous retailers reducing the number of shops and keeping their most important ones. So Instead of having 50, you might have 20 and, you know, that means they can get rid of the others, save on that, but they’ve still got their branding presence on the ground, which you probably never want to lose.

It’s just, you don’t need it as much as you once did. And, uh, yeah, so retail can, it’s a good investment. You just got to make sure it’s the right type and there’s more weak. tenants out there right now than strong ones. So it’s about picking the winners again, checking that they’ve gone okay through COVID, you know, check if they’ve paid throughout the, you know, period, have they asked for any job seeker related payments and things like that.

And, you know, it’s just about sort of de risking it. As well and knowing the types of business you’re buying to is it in a growth industry and if you want to keep abreast of the dynamics of the changing nature of retail some really good stuff around that can help you shape your perception opinion towards it so a lot of traditional retailers now are shifting online but to scott’s point they still have some flagship.

Showrooms, Temple and Webster, for example, is a bit of a darling at the moment. It’s rocketing along as everyone sort of shifts to working from home and everyone’s buying home office stuff, right? So they have a showroom somewhere and they’re largely a, an online store now. Um, so retail can be good, but don’t assume that retail is just a shop where you buy stuff.

A lot of it is amenity space, uh, stuff, food, in particular, cafes, takeaway restaurants, kebab shops, out the front of the pub on, say, by the stain there on, uh, you know, but you’re not a Northern Beaches guy, um, which has always, it’s been there forever, but it’s always busy and, uh, those shops are always going to be there, right?

Because of the nature of how people are still engaging. Think about like a bottle of, for instance, when the economy is good, people are still going to drink. When it’s bad, it probably may even drink more. We don’t know. So it’s a business that it’s really kind of just competitor driven if it’s successful or not, you know, there’s a need for it, you know, and bottle loads can range from a little 500 grand shop front to a multi million dollar drive through and that’s retail and that I’d love to own a big bottle of, you know, that that’s, you know, no matter what the economy’s doing, they generally come with long leases.

So. You know, we’ll go through more of these specific type tenants throughout this show, but it’s yeah, like there is definitely good retail and the ones that are probably not going to be there next year. So in terms of retail, can you give us some sense for how clusters of retail shops And what I’m painting a picture of here is say your suburban shopping strip or, you know, you know, when you get these like, like a horseshoe shaped type of building with a butcher, a baker, a little food store, a bottle shop, you know, how important is it when you’re buying retail that there is other retail?

around it. There must be a guiding philosophy to all this. Yeah, and that’s a great point. I’m glad you brought that up, because that’s the neighborhood shopping center is what you referred to. That’s what I’m looking for, yeah. It’s doing very well right now, especially in regional areas, because the key with neighboring shopping centers is you’ve got a lot of car spots.

You’ve got everything you need but nothing you really don’t. So you might have a big supermarket anchoring it and then you’ve got a couple of medical properties like a dentist or an actual doctor and a chemist, you know, things like that. And then you might have your hairdresser, your You know, often they’ve got things like, you know, a news agency and a restaurant or two.

A fish and chip shop. Exactly. And a Chinese restaurant. Yep. Yeah. And that’s, that’s a very common mix. And people love them. And if you’re lucky enough to be able to afford to buy one of them as a whole, like that’s a complete portfolio done in one purchase. Because you’ve got… Your big long safe lease with the supermarket that might be on a lower square meter rate because they negotiate a good deals but then all your other little properties around it actually increase the yield because a hairdresser you know relative to a you know you might be getting a supermarket at a five percent yield but the hairdresser might be a seven so you need those smaller ones pushing the yield up.

to justify the, you know, to get that return to an acceptable rate. But then there’s some retail that will struggle and, you know, that you’ve seen in the U. S. the big malls where, you know, they’ve extremely high square meter rates and, you know, it’s more kind of a fashion type upper end style, that’s struggling a little bit more because it’s not centred around the essential service type things like food and health.

And that’s what neighbourhood shopping centres have. Yeah, so I was actually looking for the right word and it’s essential, so neighbourhood shopping centres. So this is all about… Needs versus wants or utility based spending versus discretionary spending. So people need to get their hair cut. People need a bottle shop.

People need a Chinese restaurant. People need a fish and chip shop. People need a little supermarket. People need a butcher. People need a baker. So this is stuff that you do need and you don’t get that online. It’s very immediate and it’s for the now versus fashion electronics, you know, more commodity based products is what’s really getting disrupted at the moment with online shopping because you know, it’s commodity based buying.

Everyone has it. You can shop around. So I can see why that is under stress quite a lot in terms of a neighborhood shopping center. And I like the sound of it and maybe this is my first foray into, uh, commercial like in sort of regional parts of Australia. So by that, I mean, not metropolitan centers or even it might be a metropolitan suburban area.

Like, what are you in for? If you find a good asset, 10 shops in it, butcher, baker, whatever it is, right? Like stuff where people need to go every day, even if it’s just get the milk and then buy something else while they’re there. What are you in for? Ah, good question. How long is a piece of string? Yeah, so you can buy a pretty poor quality one for about 1.

  1. Okay. I find the real good stuff, like, is a starting point of about 4 mil. Okay. So, you know, you need to drop a million dollars cash, bank will do the rest, you might get two or three mates together, you know, that’s where you can start buying that stuff. They’re, they’re popular, they’re doing well, and the reason is, like, I like using the term destination type retail tenants, where you have to go there, like you just mentioned, and You know, you can’t sell your bread and all those things online, you know, it’s they’re going to be relevant in 20 years time, I feel, and it’s got to get out of the house and shop just, you know, especially if we’re working on, let’s say COVID floats around for the next decade, you’re still going to need to get out of your house and walk down to the shops and see a doctor or, you know, like, you know, get the supermarket.

Like, I can’t imagine No, that’s just ever going to be a redundant type. Well, you said you said the milkman, right? So the milkman was disrupted because, you know, he used to come every single day and drop your milk off, pick up the old bottles. He’s gone. He’s gone for 20 years now because of the rise in these type of assets or convenience stores, for example, right?

Which is just a newer version of just a standard shop. So I can’t see going back to that where. your bread gets delivered every day, your meal gets delivered every day, you might do some online shopping, and that again is a disruptive force, but I still think that people are always going to be shopping this way, you know, you’re like a tie joint, you know, yeah.

But like, I’m not a into supermarket businesses or like, I don’t know too much about it outside being involved in buying a few, but imagine Coles and Woolworths had no shop front. Wouldn’t that open up the world to more competitors? Like, if everyone can sell stuff online, you know, you might all of a sudden not know what Coles or Woolworths are because you’ve got 10, 000 other companies from all over the globe doing the same thing.

So, I don’t know, I always feel like you’ll need a big shop front. And people like foraging and finding food and, you know. People also like purpose, right? Like for some people it’s a bit of a, you know, to actually, it’s routine and repetition to go and get the milk, buy the paper. Like, I can’t, most people don’t want to sit and wait around even half a day for online shopping, right?

Like they want it now. So, I don’t mind the asset class, but it’s got to be absolutely right. Like you don’t, like the local crystal shop or, you know, stuff that no one wants to buy. I wouldn’t be investing in those areas because I think those type of retail sellers will be gone at a point in the not too distant future.

And if you’re going down that pathway, you’ve got to make sure what you are investing or the businesses that are within them have utility for a huge cross section of the population that lives in that area. And that would be a sort of guiding force for making those assessments. So, uh, industrial Scott, industrial is a little bit broader, I guess, than maybe some of the other classes.

Everyone can picture a commercial property. That’s normally somewhere where you sit with the computers in it. Retail’s where you go and buy stuff, but industrial can spread from, uh, the purpose of manufacturing to warehousing to the whole logistics business to whatever. You like industrial, don’t you?

That’s your sort of bread and butter. Yeah, look, there’s two things that are doing incredibly well in, in the COVID world. It’s gold and industrial. So gold is the industrial of the commercial world at the moment, where people have seen that it’s doing well. You know, you’ve got the likes of, you know, Amazon, they’re opening up that 200, 000 square meter warehouse at Western Sydney, which is actually the same size as Sydney’s Taronga Zoo.

That’s how big it is. And Amazon just stopped at 38. 5%. Of all U. S. e commerce in the last month was through Amazon. There you go. So nearly 40 percent of everything bought online in America is through Amazon. So it’s gold. It’s just grown. So floor space is, is, uh, valuable. There’s obviously weakness in some sections, but overall, like it’s probably, you know, the most stable and, uh, this is an overall point of view.

Like there’s outliers and everything, but it’s a very healthy market from where we’re sitting. And, you know, we’re, uh. I was up in Brisbane and agents can’t get enough stock. There’s no one really wanting to sell this stuff. And the stuff that is selling is going for tighter and tighter yield. It’s like.

We’re seeing like, you know, on average, probably a whole percent of a yield drop, which is about a 15, 16 percent growth rate just in the last six months. And it’s just because the stocks dried up. So yeah, it’s really interesting times. And you know, the tenants said generally bigger, more experienced businesses, which have, you know, like the one I was walking through yesterday was doing high end window framing.

And it was about a 2000 square meter warehouse. We helped a client buy into five years. Manufacturer or a warehouser? Okay. So they were literally cutting the steel frames, putting them together. They had a little showroom at the front too to show their finished product, but they specialized in making window frames for high end houses and unit blocks over nine stories for some reason.

That was there. And they’re doing a lot of stuff around Noosa. So they, they got the market covered and they were booming. Throughout COVID there, you know, they’ve had some delayed jobs and things like that, but you know, that was just a really interesting market. Like social distancing and all that kind of stuff can be easily maintained in places like that.

So business can keep going as long as the demand’s there. And, and yeah, look, I like industrial for those reasons. You’re dealing with sort of bigger established businesses in many examples. And. In the smaller space, like, you know, your hundred to two hundred square meter stuff, there’s a lot of tenants around, like tradies, storing vehicles to little people doing, uh, you know, starting their business out.

And, you know, you can find tenants quite quickly. The tenants don’t stay as long. So the larger the property and the higher value, the generally, the harder it is to find a tenant, but the longer they stay. It’s kind of like a little, uh, curve, which, uh, you know, the higher you go, it sort of just keeps going up.

If you were buying a, you know, a 5, 000 square meter warehouse, it’s going to take a while for you to find a tenant, but you might get that tenant five times longer than something, you know, five times smaller. So yeah, it’s that inverse relationship, which I find quite consistent. And you know, it’s just a matter of buying in areas where, you know, you’re getting good value.

You’ve got to look at the square meter rates for the bill costs. And so, you know, there’s not much supply that’s going to knock your value down or better yet. It might be a totally built out suburb. There’s no chance of more stuff coming through. So yeah, it’s a good industry and banks are liking it as well.

I’ve had many clients start getting loans and they say, or the bank will do a 70 percent loan or an 80 percent loan if it was industrial. And then we look at a retail and they were wanting more deposit. Okay. For the same client, same, everything’s the same. So if you go back in time, 10 years ago when industry was a little bit on the nose, it wasn’t the darling of commercial lending, you would have bought up a load of it.

You’d probably go to Western Sydney and just. Do the biggest loan you possibly could and buy the biggest possible warehouse and just buy all of the St Mary’s uh, industrial precinct because that stuff will be hot property moving forward. You’d be very wealthy. Yeah. This is it. So this is, you’re going to be having a, you know, a 10 time horizon when investing in commercial and sort of getting carried away right now with thinking, okay, how should you invest in a COVID environment?

You know, what is the future going to look like and offers the way people are going to work is going to change the way people are going to shop. Is going to change and the way in which commerce happens as in the buying, wholesaling and moving of products, consumer products is going to change. So you need to be crystal balling.

And in many ways, that’s one of the reasons why we’re doing this particular podcast to help shape those issues. Let’s talk about especially property really quickly. Scott, I read the other day, I can’t remember who was talking about it. Maybe it was us. Petrol stations are like the place to be right now.

People are going, it’s hard to get them. They’re hard to get approval on. They’re doing really, really well. Et cetera, et cetera. Your views towards sort of specialty type investments, petrol stations is an example, caravan parks, golf courses, car wreckers, all this sort of stuff. Opinion? Look, cause I look at return on invested capital when I invest.

So that’s the return on your deposit. When you’ve got to put a bigger deposit in. Which is what you have to do for specialty type property. So your child care service stations, you know, probably a caravan park. I haven’t looked at that, but you’re looking at minimum 40 percent deposit. And the reason there’s a higher deposit is there’s a higher risk if your business, like.

Let’s say you buy a service station, there’s only one use for that, unless you spend a lot of money fixing it. And, um, there’s a lot, and there’s also, you know, among the normal due diligence you’ve got to do, you’ve got to look at things like, you know, the environmental protection and contamination issues.

You’ve got to look at even things to do with the fuel lines and tanks, you know, because they’re underground, you’ve got to make sure they’re not leaking. So you’ve got to get that. inspected and who’s responsible for this. If there’s a, you know, a leak, you know, these are extra things you need to look at.

And it’s not somewhere that the novice investor should play in. You know, I think it’s, you know, you’re only as good as the business in that location, like if a fuel station is declining in profits because there’s another fuel station that’s been built or maybe the road’s been bypassed or, you know, more electric cars, all of a sudden your entire life savings potentially could be in that.

And fuel stations generally fit in the 1. 5 to 7 mil range, so they’re not cheap, the average one’s probably 3 or 4 mil. So you’re going to have to come up with multiple millions of dollars just for the deposit and, uh, there’s a lot riding on that one business doing well. The bonuses for it, the long leases.

You’re generally looking at a 5 to 15 year lease with, um, 5 year reviews after that. So you might have an initial 10 years and then it’s a 5 after. Mm. It’s, uh, what we’re seeing a lot, but yeah, look, it’s, I guess, you know, being my age as well, I always think, you know, what’s going to happen in 30 years time with these types of things.

And none of us really know, but we all sort of see the trend of electric, electricity cars, and that could topple off a lot of these. And you might only need one in four. And if you’re stuck on a 5 million property with 40 percent cash down on it, you know, like, it’s going to be hard to shift and your yields are going to go down and you might be stuck with a.

Bit of a white elephant, right? Yeah. You know, who knows? And that’s the difference from all the other properties we’ve discussed. If you lose your tenant in an industrial or retail or office space, you’ll find another tenant. You know, it’s just a matter of when and how long it’s going to take and at what rent value.

Yeah, no, you’re really just going to need another fuel operator who thinks they can do a better job than the previous one if your current one went broke and other than that, you’d be, uh, looking to, uh, pull the tanks out and replace the soil and hopefully turn it into some residential development and, you know, that could be a long time before you turn a profit.

That’s really good. Sort of one on one university term for the first course that you do when you go to university, might be statistics one on one as in the basics. Uh, so it’s good to get this foundational stuff sorted out. And we’ve had a chat about the tenant types and the asset dynamics. I just want to conclude, uh, with a discussion, Scott, around how do you choose when to invest in these different sort of asset classes?

And I imagine a lot of that is connected in with. So my little shortcut is knowing the rental market. If I feel like there’s more tenants looking for these properties, that’s a good forward indicator that there’s going to be growth because it’s rental growth. Your higher rent values mean your price is going to be worth more.

So if you’re buying into a declining rental market, that’s why the office space is a little bit off at the moment, it’s declining. So in two years time, that might actually affect asset values a fair bit. But if you’re buying into an area where there’s more and more tenants. And less supply, that means growing rents, growing asset values, reletability is simple, which means your lost income for long periods of time is going to be minimized.

That’s the starting point, I feel. And honestly, it’s just about knowing the market, and you know, like I know you, you, you know, you follow your shares, and all those types of things are very important. If you know the ASX, know how different companies are getting valued on the stock exchange, and how sentiment’s driving prices up.

There’s a good chance that could relate to commercial as well. Final question, Scott. When you think about investing in commercial property, and you know, we chat about a lot about this when in the context of residential, but within commercial, is there particular points at time as you go down the pathway of building out a commercial property portfolio?

Should you start with one asset class? Over another is one asset class, a bit of foundational investment than other asset classes. And putting that in the same context as residential, you probably don’t go out the first time you’re investing in residential property and, and buy a huge townhouse development block that you need to hold for many years and get a DA on and then build six properties on it.

You normally get a bit of a inverted commas, meat and potatoes type property, foundational property. How does it work in commercial? It’s all about the reletability again. So it doesn’t matter if it’s an office space, if it’s the. Perfect, let’s say it’s a real estate office space on a corner and it’s a bit of retail and it’s had a 10 year term in it, you know, that’s a good investment.

So it’s specific to the investment. You don’t need to say, I have to do a medical property or I have to do a, you know, a 200 square meter warehouse because you might find that, you know, the best deal in the best street at the right price. So it’s always asset specific, but it is good to get familiar with it and don’t pigeonhole yourself.

So I see a lot of investors say, I really want a childcare. But childcare has had quite large risks at the moment, you know, there’s government funding getting pulled from it, there’s, uh, you know, oversuppliers of them in many areas, particularly in regional, like, you know, occupancy rate to dropping. Why would you want to only consider childcare, you know, you, and you know, it’s a lot of money for those things as well, you know, you can spend five mil on a childcare.

So it’s about just understanding how easy it is to re let that property and that’s nice basic thing. If you think it’s going to be hard to get a new tenant. And it’s your first property, probably don’t buy it. So it’s always, uh, keep it simple, but it goes a lot beyond that. You know, you’ve got to get the right yield, right price.

It’s got to be the right growth market. And that’s where, you know, you might, you know, one by one exclude certain assets. Like you’ve just mentioned, you’re excluding office. That’s what many people are doing right now. So then you go, all right, I’m looking at retail and industrial. Let’s look at the best of what we can get out of that.

And then you might find a tenant that you know, that’s going really well, you know, like a bottle of, for instance, national brand, you know, you can then just start getting more specific, but you have to be flexible because the amount of stock out there. is very tight. So you may not find your ideal property.

It might be in a totally different industry. So there’s not much selection. It’s not like the residential, like we mentioned where there’s tens of thousands of houses to choose from. We’re all fighting over a handful of good properties and you know, you just got to go the one that’s a suiting you on that day when you’re ready to buy.

Really good. So that’s, um, really informative. Uh, thanks Scott for sharing those insights. What I like about this, I’m a lot more informed as part of my education as well. So, uh, it’s a real privilege to be able to spend this sort of an hour with you to record these podcasts and, you know, share that journey, share that story with all of our listeners and, uh, you know, inside commercial property, rethink investing.

It’s really growing in popularity. So make sure you talk to your friends about it. If people want to know more about. What you guys do, Scott? Like, how do they track you down? How do they find you? Um, you can find Rethink Investing on Facebook or just go to our website, RethinkInvesting. com. au. And, uh, yeah, we can just have a chat about your exact situation and see if commercial is the right property for you or not.

Great. Thanks for your time today. I really do appreciate it. No problem, mate. Thank you. We’ll see you all again next time. Until then, bye bye.