EPISODE 11: 2023 Market Predictions and an In-Depth Review of 2022 - Property Inc

[ Podcast Transcription ]

This is the Commercial Property Investing Explained Series, brought to you by Steve Polisi. Find out how commercial property really works and start investing like the pros. Your education starts now.

Welcome to the Commercial Property Investing Explained Series with Steve Polisi. I’m your host, Andrew Bean, and I’m here with author and founder of buyer’s agency, Polisi Property, Steve Polisi. How are you, mate? Hey, Andrew, how you doing, buddy? I’m fantastic, mate. How’s everything traveling for you, buddy?

So 2022 was a good year for me. I worked from 15 different countries, so tried to enjoy my passive income a little bit, so now it’s been good, but got my first little child due mid year, so back to reality, I think, and I’m sure you’re aware life’s gonna change a little bit. Yeah, I don’t know if it’s back to reality.

It’s a whole new reality. It’s a life change. You just cannot explain the seismic shift. That, that happens when you have a child, it’s unbelievable. So mate, we’ve had a huge positive response from the listeners about the podcast and our hands are pretty much tied to keep on creating them. So today I wanted to have a chat about the changing market conditions and how commercial property can actually weather rising interest rates.

As we all know, they’ve actually gone up 25 basis points today. So the cash rates are 3. 6. So Stevie. What are you seeing in the marketplace right now, mate? In terms of the market conditions, well, I’m seeing generally a reduced amount of buyers and lack of sellers. And that’s mainly due to buyer sentiment though, because people are waiting for this crash that potentially will or will not happen.

There’s less buyers out there, but then the sellers also don’t want to sell what they think is the bottom of the market. So they’re holding onto their stock because as we’ll talk about later, they’re holding on to their stock because as we’ll talk about later, Commercial property still cashflow positive.

So why would you sell it and then lose money? In general, I’m seeing about the market probably boring about 0. 2, 0. 3 percent better cap rate than we were about a year ago. And then certain sectors are still flying high. So like industrial at the moment, it’s just going bank gangbusters like. Vacancy rates are literally at an all time low.

Suburban retail has some really strong demand in some areas as well. And then as we mentioned on the podcast previously as well, like office space, the vacancy rates are still high and there’s still some risk there. But as I mentioned, like vacancy rates are literally at an all time low and rental growth is at an all time high.

CBRE reported last quarter of last year in 2022, we had on average seven to eight percent rental increase just in that quarter. So any leases that you have for something like industrial that’s coming off in the next year or two, you’re generally bumping up the rent about 20 to 30 percent. So the demand for industrial is still there.

I’ve got some agents literally waiting lists for things like industrial. So I think it’s going to be an interesting year. So it’s all going to be around those kind of interest rates. Yeah, I think we really need to specify which sector we’re talking about when we’re talking about really tight vacancy rates.

So definitely industrial, Australia wide, or most, there’s probably a few markets that I know of through CP data that are a little bit less tighter than the others. But in general, industrial has gone crazy. What are you seeing in the other sectors, Stevie? Yeah, so everyone still wants like suburban retail and those kind of bulletproof blue chip tenant type ones.

So we all know like the, the McDonald’s and the Bunnings and those kind of ones we think are recession proof. Still high demand for medical, as you’re aware, still high demand for self storage and childcare. So they’re still holding strong, which is quite nice. Actually, point to note, I actually just released yesterday.

I’ve got 16 hotspots for 2023. So if you go to my website, you can download a PDF and kind of see where I’m predicting is going to have the most growth. But the market’s still strong. The most of the sentiment comes from people thinking there’s going to be a recession. So that’s where most are coming from.

But I hear the same thing, Andrew, from every armchair investor. They all say, Oh, we’re going to have higher interest rates for the next six months and then it’s going to stop and then it’ll slowly come down. But To be honest, like that’s just a regurgitation of the same thing from every single person.

And funnily enough, none of those people have economics degree. The people that are saying it, they’re always just an armchair investor who’s just kind of regurgitated. No one’s able to pick interest rates, even the banks who have all the information about household liquidity, mortgage default, et cetera.

They’re still unable to predict it. So I don’t know why the everyday investor thinks he’s got the secret sauce and he can kind of do it. The main question I’ll obviously get with that is. Whether it’s better to fix or have variable and this, but my opinion is always the banks are going to win. So it’s going to come down to a personal opinion, like set the rate that you think you can financially handle.

And if not fix it and then go from there. Learning about how commercial property really works. Has never been easier with so many great resources around like this podcast and Steve’s book. And he’s giving it away for free if you use discount code PODCAST on his website. So go to www. podcast. com. au Dot police property.com.

Use discount code podcast to get the book free. All you have to pay for is shipping. What a great deal. How do you feel about office at the moment? Because I’m still really not liking office assets anywhere. Maybe suburban office, but still it’s a bit of a gamble. How are you feeling about office assets?

So I never liked office space, even prior to COVID for me, it was very similar to buying like a high density apartment where you’re paying a lot of money for literally a bit of airspace. Like you don’t own anything. If you buy an office, when there’s 20 offices in the same space, there’s nothing you can do with that premise.

And then if it were to grow, what they’re going to do is just buy out a few houses next to it, build another 20 story office tower. And price you out that way and cause a huge supply to the market. So, for me, the fundamentals aren’t there. You don’t have that land component or that foot and road traffic component.

But, yeah, like you mentioned, the vacancy rates are quite high. They’re generally 7 to 15 percent in most capital cities. So, I don’t foresee any kind of capital growth coming there. But, again, for me, they’re just too one dimensional. I’m not saying it’s not a bad asset because part of that is you actually get a high interest rate and we’ll, we’ll talk about this a little bit later, but most office space you can get the 8 percent net plus that’s quite attractive, but you do have to weather the storms if you do have the vacancy.

Yeah, it’s quite interesting how like looking back over the years, all the sectors have gone through their different cycles. Like office was the absolute darling, you know, buying proper office buildings, not just your single strata title, but big rates were going after office towers and they still are to some extent.

Then there was a big push for retail Westfield type retail, but now it’s come full circle back around to industrial because industrial was really the junkyard industry. Like Five, maybe even more than that, maybe seven, eight years ago, you’d be picking up yields at eight, nine, 10 percent for industrial because no one wanted it.

Yeah. It was just also an unknown. And like you mentioned, it’s a bit of an ugly duckling. No one wants to brag about the dirty fabrication office they own, but they want to brag about the office space in the city or the medical center that they own or something like that. But people are becoming more aware and actually just more student investors from people like your podcast and books and stuff like that.

Like The everyday investor is understanding now, but I like industrial because it’s never going to go away. You always need it. Like the biggest thing I get is people say, Oh, everyone needs a roof over their head. But my argument to that is like, where did the roof come from? It had to come from somewhere.

We’re always going to need car mechanics, fabricators, spray painters, wholesalers. Storage a distribution centers that you need land for. You need space. So it’s a sector that’s never going to go away. The issue and where the risk comes from is where does that area have to be like how far away from the city?

You can obviously do it out in farmland and bushland and areas like that for certain sectors. But if in a well kind of established spot surrounded by residential and it services that area or the airport or the ports and things like that, there is always going to be a demand. While the world’s turning, we are always going to need industrial properties.

Well, that’s right. And there’s a built in limited supply as well because local councils they’re not going to just extend the zoning for industrial onto residential like residential is priority to industrial zoning. So there’s a built in limited supply, which is one of the main factors that makes markets grow and assets grow.

One of the other points, and I know this because I used to be a structural engineer, is it’s very hard to build warehouses up. Economically, it’s not financially viable to build a five story warehouse because they need the floor loadings and things like that. They basically have to be one, maximum two stories, unless they’re like a really light industry type one.

So, you get that scarcity factor, and that’s the exact same opposite argument of like the office space, where that, there is nothing stopping them building up. warehouses, you’ve got that ground control. It’s interesting because only asset that’s actually building up into the sky is self storage. It’s not uncommon to see three, four, five level self storage facilities being built these days.

That’s crazy. Exactly. But that’s light industry. No one’s putting like a heavy seven ton machine on the third story of that. That’s all generally light boxes, maximum forklifts, probably a design of like 500 KPI. I’m not sure if you know what that means. Basically 500 kilograms per meter squared that they’re allowed and things like that.

So self storage is an interesting one, which I know that’s why you love it. And there’s some really cool opportunities there. Yeah, that’s right. So mate, I know for a fact now agents are actually preparing sellers a lot more for the changing of the tides, like they’re really preparing them and setting out the expectations for what kind of yield you’re going to get, what kind of cap rate we’re going to be able to sell this for.

What are you actually seeing out there in terms of like, how are negotiations going with agents? This is probably the biggest thing at the moment. There’s a huge disparity between the buyers and the sellers at the moment. A lot of buyers are trying to buy their predicted six months time prices. A lot of sellers are trying to get the six months prices from previous times.

So there’s a bigger gap in the market there. But like you said, the agents are prepping them. And like I said, we’re buying 0. 2, 0. 3 percent kind of better. The main thing is that they’re failing on is because obviously finance is really tough at the moment. A lot of commercial as we know is subject to finance and a lot of buyers are going in thinking they can get the same finance they could a year ago.

Um, but now they’re actually not, they’ve got a lot of capacity, so they’re crashing on finance. And this is another one of the reasons why selling agents are loving buyers agents at the moment, because we basically vet our buyers to make sure they’ve spoken to a commercially kind of approved broker who knows what they’re doing.

Whereas the everyday investor, this keeps crashing on finance. Like I actually haven’t crashed on, we’ve done literally 40, 50 deals this year and we haven’t crashed on one on finance because we are up to date and we’re making sure the brokers are crossing the T’s and don’t the I’s. Yeah, that’s awesome because I reckon that agents are actually prepping their clients that they’re not going to get as much for the actual property, but then they’re going out to the market and they’re still trying to get that much.

Like they’re still telling the actual buyer, Hey, we’re still selling this at a sharp yield, but they’re actually giving their own client the heads up, look, it might not happen. Yeah, but no offense to real estate agents, their job is to try to win the business as well. So they’re always going to tell the seller, I can get you the best price.

I’ve sold this one recently, I’ll match that, et cetera. So they’ll get them on board. And that’s part of it as well. Like in the heat of the market, mid 22, we had to act really fast. We had to basically, as soon as it hit the market, get it under contract within two or three days. Now it’s coming on and there’s a bigger negotiation.

You’ve kind of got that one to three week negotiation where they start high, you start low and you actually made in the middle like in the old days. So it is coming. I think as we keep seeing potential interest rate rises, that’ll get easier. If the interest rates stay the same, then it’s actually going to be a weird kind of six to 12 month period.

If we see a reduction of interest rates, then it’ll obviously get easier and the market might take off again. And so, how are you structuring your deals now? So, back when it was a really hot market, a 30 day DD wouldn’t cut it. You had to cut that down 21 days, 14 days, sometimes even 7 days to get your deal like you’re often noticed.

What are the terms and conditions that you’re putting in for every deal now? I’ve always done 14 days due diligence and I try to make sure I can get it out in time. It’s not like the old days where you ask for 30 and they’ll accept it. No, no vendor wants to sit there for a month with you, potentially crushing the deal, obviously case by case.

If it’s like a high value property, you will have a longer one. The main negotiating tool is actually the finance clause. That’s the one they care about. If you’ve got a cash buyer or you’ve got some form of security that you can get financing, you can shorten that. I’ve had offers accepted much lower than other offers based on that we don’t have a finance period or a smaller finance period.

So it is tough, but still obviously do all your due diligence and make sure that you can get financed because it is always going to be a stressful situation if you don’t. So mate, with interest rates going up today, how are you actually setting up your clients, prepping them to what might come? Because if you actually got a deal accepted today.

Interest rates went up today. Say you’re getting lending from the bank in 12, 14, maybe even 15 days, hopefully, and the banks could have already acted and increased the rates. That potentially changes the whole returns on the deal. The cash flow that you’ve once put together for the client. How are you sorting that out?

How are you fixing that? Or how are you working that problem? Yeah, so I think you’re doing very well if you get approval in 14 days, Andrew, in this market. Some banks don’t even pick up your file for two weeks now. So it’s generally kind of 21 to 28 days is the kind of finance period there. You can get approval in principles.

So basically the banks will give you, it’ll normally last about three months. So it’s sort of the same concept as a pre approval. So you lock in that current rate and then you go from there. This is why you need a good commercial mortgage broker. So they need to be up to date with it and basically forecast what the market’s doing and add your buffers in as well.

So don’t stretch right to your limits with financial loans. Just have your buffers in place there and then plan from there. If you don’t get finance, it’s not the end of the world. Never try to push a deal that you can’t get finance for. But within regards to the interest rates, you shouldn’t just be planning with your cash flow for what the interest rates are now.

Like even 10 years ago, I was forecasting I’d do a cashflow spreadsheet and you can download this from my website as well and have a play that varies from 2 percent all the way up to 8%. So I’ve always done my cashflow analysis on 6, 7, 8 percent because that’s actually where the 30 year kind of average is.

So all those people now that just working off today’s numbers, it’s good to know what the numbers are now for your cashflow, but you should always be planning for the worst and hoping for the best. Yeah, that’s a good tip to actually stress test your deals or have a stress test metric that you have in your cash flow calculator.

It’s a good tip there, mate. I was going to say, Andrew, the lenders generally do that for full dock loans anyway, they’ll do what’s called shading. They’ll add anywhere from like 1. 5 to 3. 5%. extra interest rates on what you’re paying now, they’ll do P and I, even if you’re on interest only, and they’ll take 20 percent of your rent off as well.

That’s how the banks mitigate their risk that way. Yeah, they make it difficult, don’t they? So mate, what markets have you been most active in recently? I know you’ve had a few deals under your belt this year or last year. As I mentioned before, I’ve always loved industrials, so we’re really focusing on there, and suburban retail.

What I mean by suburban retail is not the Westfield shopping centres and the CBDs and things like that, the local cafe, hairdresser, medical centre, dental, the ones where you can kind of assess the risk. You can look at it and go, okay, the residential population around that’s growing, they’re not building any more cafes and medical centres or retail strips and things like that.

There’ll always be some form of need for face to face contact services like that. So I really like them as a diversification tool, but as we mentioned in the podcast previously, there’s a pro and a con to each of them, like a industrial space. It’s a lot easier to get your head around the numbers because you’ve got like for like comparisons.

You can look at in that warehouse complex. What they rent for per square meter, what they sold for per square meter, how long the vacancy periods are and the ones that went vacant. And then you can choose similar industrial complex in the surrounding areas and look at those same numbers and you kind of get five to ten comparables.

Whereas if you’ve got like a little retail strip, say we’re buying a dentist in a little retail strip and there hasn’t been a vacancy in that little retail strip for, I don’t know, five, ten years. We actually have no idea what the vacancy period is going to be. You can talk to a property manager and try to find out some demand in that, but you don’t have any cold, hard numbers to back it up.

And then that’s the risk. There’s a pro and a con as well. So like industrial vacancy rates are really tight. You’ll most areas I’m buying, we’re talking one to three month vacancy periods, suburban retail. The vacancy periods are generally kind of one to two years because it’s feed out costs and things like that.

However, once you get a tenant, they’re stickier, they’re locked to the location. If you have a hairdresser, if they do really well, they don’t upsize and move to a bigger premise. They open another store in a different location. Whereas like an industrial tenant. If they grow, they’ll actually move to a bigger warehouse space.

So the industrial tenants are a little bit more volatile, but the vacancy periods are shorter. Whereas the retail ones, the tenants are stickier and longer term, but the vacancy periods are longer. So there’s always a prong on each. I always go to the fundamentals. Good location, good infrastructure spending, good population growth, low periods of vacancy, versatile premises.

That’s a must. And then each deal is going to have its own nuances with yields and types of tenants and fit out costs and things like that. Just to break that down even further, the reason that the neighborhood shopping center like the hairdresser is stickier is because their whole client base is built around the location where industrial property, the actual business isn’t built around that location.

It’s just convenient to have it there. It’s more convenience, you know, for the actual business. So it’s, it’s a whole different mindset. It’s actually good. You brought that up. Like, take a step back and look at what the business actually wants. Yeah, and even industrial, there’s nuances though. So like you can buy in a service based industrial complex, like the ones that actually are in suburbia and they’re the ones that actually service the local area.

They’re the ones that have like the spray painters and the car mechanics and things like that where people actually go to those premises. And then you’ve got the more kind of heavy industrial ones where they don’t care about the local population. They’re there to run a business and it’s more to do with like, can the trucks get in, how far the truck’s going, where the nearest highway is and things like that.

So it is case by case, even industrial has its own nuances. Yeah, definitely. All right, mate. So I have personally been seeing a lot more 6 percent or six caps in the advertising, the marketing for all the properties, which is, it’s really nice to see considering we were trying to get six caps for a very long time and now are very hard to get.

Have you been able to secure any deals for your clients for like really, really high returns, like something ridiculous, like, you know, seven, seven and a half, something like that. Yeah, definitely. So I’m funnily enough known as the kind of the low risk buys agent in the market. Like I focus on trying to buy some capital growth properties as well as get the extremely tight vacancy.

So I’m not just a yield chaser like some buys agency and some investors because having a really high yield looks attractive on paper and it looks great on social media, seven, 8 percent net yield. But I look at the ROI, like I think a well placed, slightly lower yielding commercial, you’ll get a way better ROI because you’re going to get better rental increases because it’s going to be more demand, better capital growth, and you’re going to have lower periods of vacancy.

So you’ll actually make more money from a slightly lower deal. But to answer your question, I’m generally saying at the moment, capital cities, we are seeing the sixes again. So most of the stuff I’m buying is between six and 7 percent for industrial and that kind of neighborhood, suburban retail. If we go regional, we’re starting to see that seven to nine percent, which is really attractive.

But again, rule of thumb, if you go out really, really regional, the vacancy periods are generally slightly longer, but we can check that in your CP data and the listeners can go through that. And then office space, if you’re chasing a really high yield, we’re talking eight to ten percent for office space, even in capital cities.

But as we mentioned, prone to oversupply and long periods of vacancy. I’ve been buying quite a lot. I’ve had a few ones for 7. 2 percent in areas like Brisbane and Perth in the industrial space. But like I said, I’ll always stick to the fundamentals first and then chase yield second. Another thing that I also wanted to break down, so I’m glad you mentioned that, because a cap rate actually is a reflection of risk or the perceived risk in a market.

So if the higher the cap rate, the more risk in the market. So the investor that goes in there. Actually is demanding more return to actually buy into that market. So the properties that Stevie’s buying for a sharper yield, they’re in markets that there is a perceived lower risk. It’s a lower risk asset.

And that’s why investors are happy to buy into that market and get less of a return because it’s a more short thing and they’re more guaranteed to get their money back. So cap rate is a direct. Reflection of risk or perceived risk in a market for that asset. I think I think you’ve used the perfect word perceived risk It doesn’t actually mean it’s less risky It’s like Sydney and Melbourne for instance have sharper cap rates than say a Brisbane But it doesn’t necessarily mean that it’s a lower risk property.

It’s just the perception is It’s a safer market because it’s like a big capital city. It’s going to do well. It’s the same argument for residential property as well. A lot of people will go regional and get a high yield. And I say, Oh, it’s risky. One of the same couple of growth falling off 17 out of the 20 best performing areas in the last 10 years were regional towns.

So it’s more perception in that regard. And you can also look at bang for buck as well. Like you go and spend a million dollars in Sydney, you get a small little 200 square meter warehouse. Whereas if you go 10 kilometers from Brisbane CBD, for instance, you can get a 500, 600 square meter warehouse. So that larger warehouse actually has more versatility.

So then it’s more to do with the vacancy rates of the region. Yeah, a hundred percent. It’s definitely perceived. It’s not a hundred percent black and white. I actually was talking about this on another podcast just recently about the difference of supply and demand in an area. So if you have a market that’s outside of a capital city, that’s got ridiculously low vacancy and huge demand and you can get better yields there.

Is that less risky or more risky than buying into a capital city? I would suggest that buying into that local smaller market with really, really tight vacancy and huge demand is less risky than buying into a capital city that you’re always going to have a lot of supply and you’re always going to have a lot of demand, but the supply demand ratio is way off compared to that lower region outside of the capital city.

Yeah, exactly right. Even like we’ll use, like I saw on CP data, Andrew, like Gold Coast and Sunshine Coast, they’re basically vacancy rate is tighter than Brisbane and the part of that reason is they actually got more interstate migration to the area. They’re actually some of the highest growing areas, but they don’t have the stock.

I actually went to the town hall meeting, when was it? The 2021 for Sunshine Coast, and they’re actually out of commercial stock that was supposed to last until 2030, and they’re out now. So they’ve got seven years where vacancy rates are only going to get tighter, but guess what supply versus demand is?

That’s capital growth as well, because the more demand you have for stuff, the higher the prices, the higher the rental increases. Yeah, it’s a cool little formula. Stay up to date with all the hints, tips, and tricks in commercial property by following Policy Property on Facebook. Go to Policy Property, hit that follow button, and never miss a beat with Policy Property.

So mate, let’s start talking about bank lending. In your opinion, this is the 10th rise in interest rates. How much harder has it become now? The biggest issue, as we all know, is the people’s reduction in borrowing capacities. We’re talking about full dock loans as well. So basically every three months you have to go back to your broker and find out what we’ve got to work with.

And then if you do find a deal, you have to act really quickly. So the biggest thing I’m finding is leased stock loans are basically off the table now. So we did a whole episode on kind of leased stock loans and finance previously on our 10 episode podcast series. In the past, where you could get, say, a 5 percent lease stock rate and you’re buying at, say, 6 percent or 6.

5%, on a 70 percent loan, that property washed its own face. It looked after itself. The banks were happy to take that risk. You get a loan based on the strength of the lease. Now that we’re actually seeing higher rates, our lease stock was generally seeing 6. 5 percent to kind of 8%. As a right, getting a 6%, it doesn’t wash its own face anymore.

So it doesn’t actually make sense in the bank size. So where I was saying 80 percent of deals kind of come through my clients three years ago on leased off loans. It’s almost none now. They’re almost all full doc loans based on people’s serviceability. But that’s also why people are shifting to commercial as well.

All the resi investors that were really struggling with serviceability, if you get twice as much rent with a commercial, that’s why they’re looking into it, because they’ve still got capacity there, whereas with the residential market they don’t. And I, I think that’s where I’ve seen a lot of the uptake in the commercial investors coming across to my services.

Yeah, well, we’re definitely going to talk about how a commercial property in general can weather a really high interest rate, but we’ll leave that to a little bit later. Mate, so the mortgage brokers that you’re working with, how frustrated are they getting with these interest rates going up, having to redo these loans all the time?

What are the conversations like with the mortgage brokers that you’re working with? Most of the time, as soon as they kind of get the green light, they are on my bum to get basically a property into the client as quick as they can because they don’t want to have to go through the whole process again.

And as you know, people’s lifestyle circumstances change. They’re like, man, they’re, they’re having a kid or they’re changing jobs and things like that. So they’re redoing work over and over and over again. But like I said, a good mortgage broker would say the light through the trees and kind of work that longterm kind of aspect of it.

Fair enough. So mate, when you’re plugging in your cashflow calculator at the moment, I know we just spoke about having different stress tests and stuff. What interest rate are you actually putting into your numbers right now for your clients? So I’ll always give a big table with all the varying interest rates, but what I’m generally seeing in the market now and kind of what I present as kind of today’s value to them is Five to six and a half percent for full dock loans is quite the norm at the moment.

And then for self managed super fund and lease dock, it is quite high. We’re talking 6. 5 to 8%, but like I mentioned before, always kind of plan for the worst. Like I’ve always done them at six to 7 percent anyway. So just plan for the worst, expect the best. And are you actually prepping your clients or speaking to your clients about whether or not if they’re actually borrowing the entire deposit and then also getting lending on top, you know, it’s very, very difficult to make these properties actually be cashflow positive.

You do actually have to take on debt and use cash in the bank to actually work the numbers so it’s positive. Yeah, exactly right. So the cashflow spreadsheet I was talking about, which you can download free on my website as well. It actually has all the varying interest rates and then it has all the varying loan to value ratios.

So for each interest rate, it will show you what the cashflow return is at 70%, 80%, 100%, 105 percent loans. So we can kind of see the numbers there. The good thing is most of the time, if you are going to say a 70 percent loan, you are cashflow positive. Generally the interest rate has to be two or 3 percent higher for it to start going neutral.

But like you mentioned, if you’re going like a hundred or 105 the whole amount, you’re generally going to want to try to match the yield with the interest rate you’re getting. So that way it is mutually good. It might be slightly negative if you do have a high interest rate thing, but it doesn’t mean it’s a bad investment.

And this is what I alluded to before. I don’t necessarily just chase yield. I actually try to get the capital growth as well because for me that is much lower risk than buying a residential that’s 20 grand a year negative. And if interest rates go up one or 2%, then it’s really, really negative. So the longterm aspect, you will be okay because like industrial rents, for instance, are growing like 8 percent per quarter.

So we’re actually not seeing a huge change in the bottom line cashflow as we were a year ago. So even though interest rates have gone up. So have the rents in proportion as well. So it’s not changing there. What will actually happen is if interest rates ever go down and you’ve got this huge demand and the rents keep going up, that’s when it’ll turn basically supercharged and it’ll go really cashflow positive.

Yeah. Well, I mean, the conversations that I’m having with my clients is that if you’re actually borrowing of 100 percent for this actual property, like you might be refinancing some residential property to get the actual deposit, and then you’re also taking finance out for the rest of the actual loan, you need to have some good value add strategies or some way to boost the income after you buy the property, or there needs to be some development or some way to You can actually increase the returns because, you know, at the end of the day, speculating on capital growth, it’s a difficult thing to do.

It’s just speculating. There’s no other way to actually dance around it. It’s a real speculation play. You can go into the best markets with the best prospects, but at the end of the day, it doesn’t mean that it’s going to grow. So. At the end of the day, I really like to look at potentially under rented property where I’m sure you speak to your clients about it too when you’re finding a property for them, you basically be looking at the rate per square meter in that market and you’ll be like, hey, this is at least 30 under market rent.

next rate review or rent review, you’re going to be able to pump this up. So you’re going to get a really good return. So if you actually are taking out 100 percent borrowings on your actual property, it really is a good idea to try and figure out a way that you can boost that income and value of the property.

Yeah, and I encourage the listeners, if this is the first episode you’re listening to, go back to our 10 part series and listen to the value add episode, because we go over all those techniques and things there. Um, one point to note is, if you are refinancing a residential property, Be aware that say you’re using that as the 30 percent deposit, you’re only pulling that out against a residential interest rate.

It’s not the commercial one. So it actually is quite low. So the numbers aren’t as bad as you think. You’re not paying like 105 percent mortgage on a 6. 5 percent interest rate because you might have say a 4. 8 or 5 percent on your residential loan. So 30 percent of it’s covered there. So you still can get some good positive cashflow.

Interest rates for residential at the moment, because I’m doing a refinance myself, around five and a half or low fives that I’m seeing, so you definitely can work your numbers and go out and find the best interest rates you can, make the deals work, so. Yeah, and like you said, if we find a value on opportunity, the rates are actually quite insignificant.

If you can boost your rents by 20%, you’ve cancelled out any of those increases. Yeah. Well, that’s right. Talking about what I’m actually doing with self storage, it’s like the person leaving money on the table, all you have to do is go in there and raise the rates because they’re not willing to do that and they’re leaving money on the table and that’s what you’re taking off.

So it’s quite easy to do in the, like I said, the vacancies for industrial and suburban retail to push the rents up. It’s quite easy at the moment. So you’ve got opportunity there. If you can find something that’s maybe on a couple of years left on the lease or one year’s left on the lace where other buyers aren’t interested because it’s got a short lace.

That’s an opportunity to bump the rent up and get the cash flow now. Yeah, definitely. Well, mate, so in your opinion, what banks actually have the greatest appetite right now for commercial property? I’m sure you have some favorites. Yeah. So obviously not financial advice. And I encourage you to go speak with an experienced commercial mortgage broker.

If you need a recommendation, just reach out. I’ve got lots of good brokers that I can recommend that a third party completely separate from The main lenders I’m seeing at the moment, Andrew, are ANZ, Suncorp, BOQ and Liberty. They’re the kind of four that just keep popping up for lenders. So I imagine they’ve got some sharp rates and some good returns.

ANZ for a moment, like today’s date’s obviously the 7th of March. They’re doing 5. 64 percent at 65 percent LVR, and that’s inclusive of the Fed rate increase. I’m not sure about the today’s one. And for 80 percent LVR, they’re doing 5. 95%. And they actually pay a valuation fee as well. So that’s some fairly sharp rates for an 80 percent lend.

Yeah, I’m using ANZ myself and I actually got to them through Liberty. Oh, there you go. Funny you mentioned it. Alright, mate, so what would you say to a client right now if they said to you they don’t want to buy commercial property because of the prices going up or down? I actually get asked this probably every second sales call, people say, should I sit out of the market for six months?

The funny thing is I’ll spend an hour long doing some strategy with them talking about how property is a long term gain. They’ll agree with me the whole conversation. Yep. I’m buying this for a 10, 20 year investment properties, a long term gain. And then we always get to the last five minutes of the call and they go, Oh, I’m actually going to wait out of the market for six months just to get a bargain.

And I’m just like. Didn’t we just spend an hour talking about how property was a long term game, but now you’re trying to play the short term game. So it’s completely juxtaposed with each other. I’m yet to meet anyone who can pick the market to six months. It’s just impossible. I know some very high net worth investors.

I’ve been doing this for a long time. Like how many people do you know at the start of COVID said property was going to boom. We don’t know the interest rates. We don’t know what the market’s going to do. If that was the case, like five years ago, when interest rates are lower, why weren’t we getting scared waiting six months because interest rates are going up, but so were commercial property prices.

So why is now the turning point? It’s always going to come down to supply and demand, but there’s always a reason not to buy. Like in the last 10 years, I’ve seen like Royal commissions, APRA lending restrictions, removal of negative gearing, pandemic, a war in Ukraine, supply chain issues. Always something every six months of reason not to buy.

But here’s a fun fact for you, Andrew, in the last 30 years, every single commercial property has quadrupled in values in capital cities. That’s holistically quadrupled in value in 30 years. So it doesn’t actually matter about picking the market. It’s time in the market. But like we said, supply and demand focus on those fundamentals, generate some fabricates and value add opportunities and get that cashflow sooner rather than later.

And I would actually argue for people who are saying that we’re in a bad kind of lending time at the moment. This is actually more going back to a normal type of market. We’ve been in such a hot market and with record low interest rates. That’s actually not normal. To have a cash rate of 3. 6 or even around 4%, that’s more normality and that’s where long term averages have been as opposed to being at like 2 percent or 1 percent or half percent.

It’s crazy. The funny thing is I’m actually a supporter of high interest rates and I’ll explain why. So like, the fundamentals of commercial property at strongest they’ve ever been. Like, vacancy rates are literally at an all time low, rental increases are an all time high, and unemployment’s at an all time low.

So businesses have money and they need the space. So if we had that perfect formula, plus low interest rates, the market would be going absolutely crazy. But I, I don’t want a crazy market. I don’t want a market that grows by 50 percent and then drops by 30%, then grows by 60%, drops like that. I like a nice five to 8 percent steady growth rate over the next 10 years.

So all my forecasting, I can plan for the future. I don’t want volatile markets. So all the fundamentals are really strong. The whole reason interest rates are high is to calm the market down because otherwise it would be going too crazy. Yeah, well, it has been going too crazy and I’m, I agree with you.

I’m totally with that saying that this is actually a better time right now to be buying property. It’s better that the interest rates are higher because you have more wiggle room, you have normal negotiation with the sellers. And you can start finding a lot more deals. I’m seeing a lot more good quality deals come out that previously they’d be in and out of the door sold straight away for the sharpest deal you could ever think of.

You get your foot in the door a lot more and people are a lot more willing to negotiate. And I think this is a really, really good time. I obviously like all types of investment. I’ve literally wrote a book on commercial and resi. Like there are some good investment opportunities in both markets, but have that longterm mindset in a hot market, you’re going to pay probably a fair market price.

In a cooler market, you’re going to pick up a bargain. And as we mentioned before, get a better value add project. Like if there’s more wiggle room and kind of more stock and more versatility there, you can actually do some more creative things. Yeah, definitely. All right, mate. Well, let’s move this conversation to how a commercial property can actually weather very, very high interest rates.

So Steve, I’m sure you get this all the time, as do I, where people will say the interest rates are like five or 6%. You know, I see a commercial property. It’s also getting sold at a six cap or a 6 percent yield, and they think they’re losing money. How do you explain that to the person simply and quickly and without pulling your hair out?

Yeah, what’s interesting with that, Andrew, is the people that say that then say they’re going to go buy a residential because it’s safer, they don’t want to buy a negatively geared commercial property. And I’m just kind of like, are you aware the commercial is two to three times more rent than resi? So that argument goes out the window for residential again, download the residential cashflow sheet on my website.

If you want, you can compare the numbers that way. But like we sort of alluded to before, if you’ve got say a 70 percent debt, the interest rate has to be a few percent higher. And once you have a play with the spreadsheet, you’ll actually realize even at like 10 percent interest rates, you can weather that storm.

Like a million dollar commercial property might only be 10 grand a year negative. And I know that’s not ideal situation, but you do the same thing on a residential property and it’ll be 20, 30, 40 grand a year negative. So I know you can hold a lot more commercial property with those high interest rates.

I’m not going to pretend that I know interest rates are going to go higher or lower, but like I said, you plan for the worst and basically set your buffers based on your circumstances. If you’ve got a stable government job that you can never be fired from, you can have a kind of a bit more risk that way.

If you’re a small sole trader with kids, for instance, then you need to plan for kind of more fluctuations in interest rates. And that’s where you’ll decide, okay, is it worth getting another property or fixing the rates and plan from that. Yeah. It’s good advice, mate. So I’ve got an example here to try and break it down to make it bring a little bit more clarity around it.

So we have a 60 percent net income. If we divide that by the million dollar purchase price, that’s a six cap. So we’re looking at a property that yields 6%. The outgoings are paid by the tenant. So we’re netting 60, 000. If we have a 1, 000, 000 purchase, 1, 000, 000 and we’ve got a 70 percent LVR, that’s a 700, 000 mortgage.

Going back to the interest rates, if we have a 6 percent interest rate on a 700, 000 loan, That’s 42, 000 per year in interest that we’ll be paying. So we’re netting 60, 000 and we’re actually got to pay 42, 000 of interest. So there’s an 18, 000 cashflow there and that’s how we work out cashflow. So. I know that probably is hard to understand through a podcast.

If you want to take a look at this, Steve and I are doing a video as well. Maybe that’ll be a bit easier to understand. Just to give you an idea of the big difference between residential and commercial property is who’s paying the outgoings. That’s the real game. Who is paying the outgoings? So if you’re netting 60, 000, and that’s net, and then on a residential property, if you’re grossing 60, 000, huge difference there, because if anything breaks down, and I know, because my water heater just broke down, it cost 1, 700 to actually get fixed, you know, cash flow, so in a commercial property and the tenants paying for those outgoings, it’s a big difference, and that’s the game, who is paying the outgoings.

Yeah, and like I mentioned, we’re, we’re seeing 20, 30 percent rental increases as well. So all of a sudden that 18, 000 cashflow actually becomes 25, 30, 000 if you kind of bump the rent up that way. And I know it’s not a reason to buy a commercial, but you actually get better depreciation on a commercial as well.

So that actually looks more attractive at the end of tax time as well. Yeah, that’s it. All right, mate. So in terms of with your clients, they’re tossing up because I know you do residential and you do commercial, which is pretty cool. So if they’re tossing up between buying into a commercial property or buying into a residential property, how do you actually explain to them the difference between buying a commercial property and a residential property right now?

The main difference with commercial and residential is normally the power of leverage. So with residential, this is why I like residential as well. You can go out and get 80 90 percent loans very easily. So you can leverage and make your money work harder for you. Where you might only be able to buy one commercial, you might be able to buy two residentials.

I’m definitely seeing a shift to the high yielding residentials though. So as interest rates go up and people’s serviceability goes down, they’re looking for those high interest rates. So there’s a lot of interest in like the Brisbane and Adelaide residential market where you get that four and a half to kind of 5 percent gross returns.

We’re also buying regional towns as well, so I’ll buy like duplexes, house and granny flats, little blocks of apartments, where you can get that 6 to 8 percent gross yield, and that’s purely from a finance and a planning point of view, because people don’t want to buy a million dollar property in Sydney that’s going to cost them 20 grand a year just to hold, so there’s a bit of a shift there.

In terms of the decision, what’s right for you, it’s going to come down to what you’re trying to achieve. Over what time frame versus what you’ve got to work with and what I mean by what you’ve got to work with. That’s your residential capacity versus your commercial capacity because sometimes those numbers are quite different.

I had a client last week where we only had 1 million residential capacity, but we had 2 million commercial capacity and that’s because it wasn’t his actual available capital that was problem. It was his serviceability. And then you also get clients on the flip side as well that might not own any commercial properties.

But they can still get 90 percent loans. They might have two or three times kind of larger borrowing capacity with residential. And then that might be right for them. But again, it comes down to, like I said, what they’re trying to achieve and what timeframe a young client is completely different to a 65 year old client where we are just chasing cashflow and not capital growth.

Whereas the young client who’s got time on his side, that’s the power of leverage. That’s the focus get as large a portfolio as we can, because over the test of time, we’ll make more money from the capital growth. Yeah, it’s a good perspective there. So mate, in your opinion, why is now a good time to buy?

I’ve always said this over the last 10 years of being a buyer’s agent. It’s not so much now. You should actually buy when you’re educated and when you’re ready. As we mentioned on this podcast, no one’s got a crystal ball. You’ll buy a good property at the moment because the market is a bit cooler. You have a bit more versatility, a bit more time, you know, it’s not going to be as a stressful situation, but as I mentioned before, for commercial, the macro data is just so strong.

Vacancy rates, all time low rental growth, all time high unemployment, all time low. So now is a good time to buy. The best time was 10 years ago. Yeah, that’s right. Alright mate, so I know you’re handy with a spreadsheet. What spreadsheets do you have available for people to check this out for themselves?

Yeah, so if you go to www. policeyproperty. com I think there’s about 10 spreadsheets now I have like cash flow calculators, comparing residential and commercial. I’ve got a return on investment calculator. I’ve got a pay down calculator. I’ve got some sample property plans and things like that. And obviously you can get a free copy of my book as well.

Just use the word podcast at checkout. And I give it all away. Like I, I’m not doing this just to kind of bring in business. I’m giving free market. You can go out and buy your own commercial. You don’t have to use the services as a buyer’s agent. It’s all there ready for you. But I’ll obviously, hopefully add some value if you do want to engage my services.

Fantastic, mate. Well, this has been author Steve Polisi and Andrew Bean on the Commercial Property Investing Explained series. Thanks, guys. Awesome. Thanks, Andrew. Thanks for listening to the Commercial Property Investing Explained series. This show has been produced by the Commercial Property Show Network.