How to Make Every Lease Count in Investment Property in Brisbane

money on table

When you own commercial property or retail property in Brisbane or Queensland, the leases that reflect the tenancy mix are the foundation of the cash flow.  In many respects it is the cash flow that attracts other investors to the property when a sale is forecast.

Then when it comes to selling that property it is the leases and the cash flow that will drive buyer interest and ultimately assist in getting a better price for the property.  So, the best idea is to negotiate your leases carefully with due regard to the future of the property and your investment targets.  Ask plenty of questions.

city building high rise
Look at Your Investment Property Comprehensively

What About the Tenants?

Another thing to remember here is that not all tenants are good tenants.  You must look at a tenant comprehensively before the lease transaction is accepted.  The things to review with a tenant occupancy include:

  • Where they are coming from
  • Lease history from other locations
  • Landlord comment from other locations
  • The tenant’s ability to pay the rent for the long term
  • The existing cash flow from the property
  • The incentive that the tenant is looking for

A property with a good lease profile will create property investor interest; it’s that simple.  It then stands to reason that the lease negotiations that occur in your property should be carefully planned and optimised.  You never know when you want to sell or refinance your property.  The leases that you have in existence will be the attraction to support your marketing processes and investment needs.

building entranceway
Attract your tenants to your property with optimized leases.

Look at the Leases and the Overall Tenant Mix

So, what can you do here as a property investor?  Look at all your leases and the broader tenant mix.  Set some rules and standards about these things below and then see a good solicitor to help you with the lease creation:

  • Rentals
  • Rent review timings and standards
  • Option terms
  • Make good provisions
  • Lease terms and conditions
  • Ideal tenant type and operations

When you make every lease count, the property starts to take on a whole new level of performance in its asset class.

The Advantage of a High Quality Lease in an Investment Property

retail shopping mall

So many landlords today in Brisbane and in Queensland negotiate a lease agreement with a tenant and do not think deeply about the elements of any lease to be created.  They just leave the lease to their property solicitor to formulate. 

Certainly solicitors know what to do in creating a lease, it’s just that they do not always know much about the property in question.  More often than not, the solicitors working on the lease documentation will have not seen the property at all.  That then leaves the opportunity wide open for a lease document to be prepared that does not specifically match the uniqueness of the property.

woman checking fruit in shop

Retail Properties are Different

When leasing office or industrial property the terms of a lease can be fairly standard, but when it comes to retail property the lease should be specially structured for the investment plans of the landlord and the function of the property. 

Retail property is very much a vibrant and active type of investment.  Things can happen at any time involving tenants, landlord, or customers.  That is where a good property solicitor will review the lease, match it to the needs of the property, and then balance that with the investment plans of the landlord.  Proof of this fact is that most large properties will have a special lease formulated by the solicitor acting on behalf of the landlord.

Tenant Mix Review Strategies for Retail Property Investors

shopping centre mall

When purchasing a commercial property it pays to set some realistic and achievable lease plans and targets.  This is fundamental to the future of the property and the cash flow.  It can also protect tenant mix and tenant stability.

man standing outside of office building

When looking at a commercial property for the first time, review the leases and occupancy documentation for issues involving:

  1. Type of rent
  2. Payment of rent
  3. Growth of rent
  4. Rent review processes
  5. Rent review timings
  6. Make good requirements for the tenancy
  7. Obligations on the landlord and the tenant during the lease
  8. Obligations on the landlord and the tenant at the end of the lease
  9. Seek out details of lease incentives that may be still current
  10. Review the outgoings paid under the lease by the tenant and by the landlord
  11. Look for recoveries of outgoings paid under the lease and how the landlord can get back money for that
  12. Look for refurbishment or renovation provisions imposed in the lease and how they can impact the tenant or the landlord

Remember the rules as you consider property purchase.  When in doubt seek out a good property solicitor before any decisions are made.  The critical thing to know when purchasing a commercial property is that you are not just buying the improvements but also the structure of the leases and the cash flow.

How to Watch the Commercial Property Market for Opportunities

city buildings on skyline

At times like this there are significant changes going on in the commercial property market in Brisbane, and many opportunities around.  If you have spare funds available to put into the purchase of a new commercial property, there is no doubt that good opportunities exist.  It’s a matter of what you are looking for and how much you can spend.

There is a balance being reached between sale and purchase; it’s a process of cycle and value.  The buyers can be selective, the sellers must be realistic on price outcomes, and the available funds to transact a sale are less available than say 2 years ago. The banks and finance groups are more selective on loads and loan qualification.  First time buyers of commercial property need to provide a good financial history and a strong net worth position that underpins the loan position.

What is a Property Cycle in Commercial?

This is a property cycle and we have seen it before; after years of high demand and high prices, the values reach a level where buyers are more selective and slower to react.  In saying that, a quality property will always attract attention; it is just a matter of what price can be achieved.

So many people have said that ‘timing is everything’ when it comes to property investment; today is a case in point.  Now is a good time to purchase given that some buyers are more restricted with funds access and may not be able to move on even the best of properties.  

Well positioned buyers and property investors are in one of the best of markets right now.  They can pick and choose the properties they like; they can strike a reasonable bargain without being too eager or pressured into a transaction.

woman using computer

Things to Look for in Investment Property

So, what should you look for in the property market and with commercial or retail properties?  Try some of these things to monitor in your preferred investment location and or property.  Properties with:

  1. Good tenant profiles and companies or tenants of substance
  2. Good tenant mix that balances customer interest and business sales
  3. Great location for ongoing business
  4. Solid lease documentation that supports the investment factors in the property
  5. Low threat of vacancy over the coming years
  6. A history of solid income growth and low risk of income loss in the future
  7. Good controls on expenditure and budgets to support that
  8. Long term anchor tenants of stability and popularity

So why would a property investor sell one of these great investments?  Simply because right now many property investors must sell; they must reposition their financing and larger portfolio.  This is a great opportunity for those that can buy commercial and retail property.  Timing is a good leveller for those that can wait for the cycle to come back.  Right now, it’s back; it’s a buyer’s cycle in commercial property.  It is a good time to invest in commercial and retail property right now and over the coming 12 months.

Why Tenants are So Valuable in Commercial and Retail Property Performance

tenants in shopping mall

Landlords in Brisbane should spend more time strengthening relationships and services for their tenants in commercial and retail property.  Successful tenants help a property investment thrive; they bring stability to the asset.

A stable tenant and their business can add value to the investment property in many ways over time.  Conversely, lengthy and frequent vacancies will pull back the outcomes for the investment in rents, occupancy, and property value.  An investment property that is ‘volatile’ in income and occupancy is generally harder to lease and to sell.

Some Tenants are Better Than Others

There are differences in tenants of course; some are more valuable than others as part of an investment property and its performance.  A large corporate tenant is generally a good part of the property income for quite some time; that must be protected and nurtured. 

Stability in cash flow and occupancy is a core element of property performance.  I go back to the point that more landlords of commercial and retail property should spend time encouraging the relationships and support systems for their tenants.

Where can that help be created?  Try some of these:

  • Early lease negotiation to provide the tenant with lease stability
  • The ability to change occupancy when expansion or contraction is required
  • Fair and reasonable market rent reviews with due regard to market conditions
  • Regular meetings with the tenant to ensure concerns are addressed
  • The selection of a good property manager that has experience and skill
woman operating machinery
Work with your tenants and their business.

Create a Tenant Retention and Contact Plan

When it comes to leasing and managing your commercial investment property, it pays to keep in close contact with your tenants.  Tenants are like ‘gold’ and should be encouraged to remain in occupancy providing they are ‘stable’ and ‘relevant’ to the overall tenant mix; there is a balance there to watch and cultivate.  An investment property with a stable tenant profile will always attract more buyer enquiry and be easier to sell when the time comes around.

Realistically, commercial tenants and retail tenants all suffer issues relating to business activities and occupancy over time and through the year; the same can be said for the property owners and investors.  There is a partnership between the landlord and the tenants that should be encouraged.  That is where flexibility and communication are important controls to implement as part of the property management and leasing plan.   

business men walking in street
Connect with your tenants in a positive way.

Don’t Be Agressive as a Landlord with Tenant Occupancy

Landlords that are too aggressive on rents and lease negotiations are generally those landlords that lose the respect of their tenants over time, and that will be the first sign of a rising vacancy rate in the property.  When leases come to an end, those tenants will be the first to leave or put pressure on the property owners for any negotiations.

So, what can you do here to prevent those problems from starting?  Some of these ideas may help:

  1. Meet with your tenants monthly or quarterly to ensure that any issues and pressures are identified early
  2. Watch arrears issues and talk to tenants early to identify cash flow issues
  3. Administer the critical dates in a property in a timely way to ensure that nothing is left too late
  4. Keep on top of building maintenance problems, so the tenants have no hindrance to occupancy
  5. Address any lease expiry and rent review issues early so the tenants can plan for changes and pressures
  6. Ensure that the property is functional and attractive to tenants and customers as they visit the property.  That will include all services, amenities, and common areas.
  7. Maintain the exterior of the property, so it creates a ‘high-quality’ image for all tenants as they transact business and encourage customers.
  8. Provide practical and ample car parking for tenants and customers.
  9. Maintain the plant and equipment in a property, so that tenant ‘comfort’ is provided
  10. Look at how tenants can market their businesses on directory boards or pylon signs.
  11. Provide good on-site security, access, and communication channels for all tenants.

These simple rules help greatly in controlling tenant interest and encourage them to remain in occupancy as part of investment property performance in Brisbane.  Good tenants are at least half of the equation when it comes to commercial and retail property outcomes.

Anchor Tenant Choices in Shopping Centre Investments Today

retail shopping mall

Have you ever thought about what makes a shopping centre so successful as an investment in Brisbane when other similar properties nearby are struggling?  There are usually a few things in the answer, including the landlord’s commitment to the property function and appearance, the tenant mix, the marketing program for the property and tenants, elements of community involvement, ongoing customer attraction, and the anchor tenant. 

You could say that it is a special ‘retail formula’.   It is a unique blueprint to balance and maintain; shopping centre managers and leasing specialists in Brisbane know all too well the importance of the equation and the balance of it.  Neglect one part of it and weaknesses can develop.  The retail property can degrade very quickly.

Expect retail sales to be important to your investments

Fundamentals of Retail Property Performance

So, let’s look at the anchor tenant part of the equation.  When it comes to the performance of the retail property, the anchor tenant selection and success will be fundamental to the performance of the property.  On that basis, you should choose your anchor tenant to the future of not just the property but also the community of customers.

Key factors to bring into the leasing decision in selecting an anchor tenant will be:

  • Required lease term (generally long)
  • Option term (also generally long)
  • Base rental or turnover rent provisions
  • The anchor tenant match to the customer demographic
  • Rent review alternatives over the lease duration
  • Marketing initiatives of the anchor tenant into the local area
  • Fit out designs and refurbishment covenants in the lease
  • Branding match to the property and signage for the anchor tenant
  • The integration of the anchor tenant into the property tenant mix
  • The lead time to exercise the lease option for the anchor tenant
  • Levels of trade expected and required for the success of the tenant

Anchor tenants can bring stability to your market rent levels and create lower vacancy factors.  A retail property with a good anchor tenant will support the specialty stores and underpin the opportunity of retail trade for everyone.    So, a landlord should work closely with any anchor tenant in occupancy to ensure support and involvement in multiple ways.

Shopping carts
Attract more customers to your retail property.

Things to Review in Shopping Centre Purchase

If you are looking to purchase an existing shopping centre with an established anchor tenant, ask these things as part of the due diligence process and lease document review:

  1. The duration of the lease and the options
  2. Critical lease dates relating to lease occupancy and enforcement
  3. The levels of sales for the anchor tenant over the last three years
  4. The marketing plans and campaigns underway at the property and for the anchor tenant
  5. The dynamics of the anchor tenant and the specialty stores
  6. The customer facts and figures relating to retail trading days of the week, the patterns to the visitor numbers to the property, and the seasonal sales throughout the year.

Information like this can help you understand the complete ‘dynamics’ of the retail property and its successes as an investment.  Look for the strengths and weaknesses in every situation with retail trade, the tenant mix, and the property performance.

Things to Know About Landlord and Tenant Relations in Shopping Centres Today

retail shopping mall

The shopping centre and retail property markets in Brisbane and Queensland are changing today, and that will reflect on how tenants create sales, attract customers, and grow their business over time.   The internet and the ‘online’ side of things are now changing how property occupation works, retail sales, customer interest, and just what businesses need to lease premises successfully for the long term. 

Many retail businesses today don’t need to lease as much space as previously required.  Sales per unit of area are now an important equation to be monitored.  It all comes down to a ratio of occupancy costs to Gross Turnover.  Different businesses have different ratios and the averages for the retailer type are worth understanding. 

money on weight machine
Rental money is only part of the retail shop and tenant equation.

Ratios of Rent and Occupancy Cost

Food type retailers tend to be at the higher end of the spectrum at around 15% to 20% of occupancy cost to turnover.  Those landlords that are seeking higher rent, will push the ratio up for the tenant, and that is not always sustainable for the longer term.

Conversely at the other end of the ratio assessment, fashion type tenancies are now seeing their profit margins fall and turnovers reduce (all due to the internet and sales occurring online).

Given these problems, landlords would be well advised to manage their rents to realistic and not aggressive levels.  It is better to have tenants paying a moderate rent for the longer term, than tenants closing their businesses due to lack of profit.  The value of landlord and tenant relations should be understood and respected.

woman holding shirt
Manage the retail shops and tenant mix in a positive way.

How a Landlord Can Work With Tenants

The extension of this is that a landlord should work with their tenants in a positive and consistent way.  How can a landlord encourage positive tenant relations?  Try some of these for starters:

  1. Regular meetings – this sounds logical, but it is surprising just how ‘random’ many landlords are with tenant contact.  They let the contact go until something starts to pressure the tenant relationship or the occupancy.  When the ‘pressure’ is on, lease negotiations are always harder, and the alternatives to solving a lease problem will be less for both parties.
  2. Create comprehensive leases that work for both parties – the lease document supports occupancy and income stability.  When you look at it from that perspective, how a lease is created should be carefully considered.
  3. Clarify and control critical dates for all leases – this is a planning process of an advanced and positive nature.  Critical dates coming up with any leases should be watched and tracked at least 18 months out from the ultimate date.   That is how you can stabilize an investment property.
  4. Be flexible in tenant mix alternatives – if a tenant is under pressure, then look at the variables of expansion, contraction, or relocation.  There are ways to solve a tenant lease problem related to local business pressure.
  5. Understanding property use – for the investment property to thrive over time financially, the use of the property must be optimized.  There will be a balance between common areas, leased areas, car parking, and services.  The owners of competing properties of the location will always be seeking to attract tenants.  All the more reason to stay close to your tenant mix and property occupancy.
  6. Occupancy is not just about rent – collect a fair and reasonable rent for the property and the location.  Aggressive and high rents force people away from a property.  Look at the bigger picture of property occupancy costs including rent and outgoings.  How do they compare to other properties in the location?  Preserve your tenant mix by keeping occupancy costs in the ‘fair and reasonable’ zone.
  7. Negotiating leases early – if a lease matter is coming up (option or expiry), it is timely and sensible to negotiate any lease matter early.  Don’t wait for the lease date to arise before you start discussing things with the tenant. 

So, these are valuable ways to work with tenants and preserve lease occupation in commercial or retail property.  Improve your investment property and stabilize it by negotiating with and consulting your tenants in a positive way.  Their business success will be the foundation of your real estate investment and its performance.