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.
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
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
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.
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
Rent review timings and standards
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.
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.
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.
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.
When looking at a commercial property for the first time,
review the leases and occupancy documentation for issues involving:
Type of rent
Payment of rent
Growth of rent
Rent review processes
Rent review timings
Make good requirements for the tenancy
Obligations on the landlord and the tenant
during the lease
Obligations on the landlord and the tenant at
the end of the lease
Seek out details of lease incentives that may be
Review the outgoings paid under the lease by the
tenant and by the landlord
Look for recoveries of outgoings paid under the
lease and how the landlord can get back money for that
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.
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.
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:
Good tenant profiles and companies or tenants of
Good tenant mix that balances customer interest
and business sales
Great location for ongoing business
Solid lease documentation that supports the
investment factors in the property
Low threat of vacancy over the coming years
A history of solid income growth and low risk of
income loss in the future
Good controls on expenditure and budgets to support
Long term anchor tenants of stability and
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.
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
The selection of a good property manager that
has experience and skill
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.
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:
Meet with your tenants monthly or quarterly to
ensure that any issues and pressures are
Watch arrears issues and talk to tenants early
to identify cash flow issues
Administer the critical dates in a property in a
timely way to ensure that nothing is left too late
Keep on top of building maintenance problems, so the tenants have no hindrance to occupancy
Address any lease expiry and rent review issues early
so the tenants can plan for changes and pressures
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.
Maintain the exterior of the property, so it creates a ‘high-quality’ image for all
tenants as they transact business and encourage customers.
Provide practical and ample car parking for
tenants and customers.
Maintain the plant and equipment in a property, so that tenant ‘comfort’ is provided
Look at how tenants can market their businesses
on directory boards or pylon signs.
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.
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
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
Rent review alternatives over the lease duration
Marketing initiatives of the anchor tenant into
the local area
Fit out designs and refurbishment covenants in
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.
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:
The duration of the lease and the options
Critical lease dates relating to lease occupancy
The levels of sales for the anchor tenant over
the last three years
The marketing plans and campaigns underway at
the property and for the anchor tenant
The dynamics of the anchor tenant and the
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
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
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.
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:
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.
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.
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.
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.
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.
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.
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.