Reviewing yield criteria

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galway_blow_in

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With rates rising, it seems inevitable that fixed income will now compete strongly against property for income seekers .

Add to that lending will tighten, I see an interesting commercial investment property near me with a fifteen year lease in place since 2016 , yield would be just shy of 7% after stamp duty of 7.5% is paid, in the current climate however, I’m inclined to think 7% is too low ?, yields on UK Government debt are approaching 5% for ten year gilts

Suppose I’m asking how to reprice as best as possible based on a rate tightening environment?

No perfect guide presumably but perhaps a “ rule of thumb “ ?

Cash purchase if I were to go for it
 
galway_blow_in said:
I’m inclined to think 7% is too low ?,
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I am as far from an expert as you can get but I've always heard that commercial property investment should generally support double-digit yields.


Tenant risk is generally high and commercial buildings generally depreciate faster than housing does.
 
NoRegretsCoyote said:
I am as far from an expert as you can get but I've always heard that commercial property investment should generally support double-digit yields.


Tenant risk is generally high and commercial buildings generally depreciate faster than housing does.
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It would be extremely rare to secure a commercial property in a good location with double digit yields

Whether yields need to be double digit is of course a different matter ?
 
We looked at property for rental over the last few years both residential & commercial & basically concluded that it's simply not worth the candle in Ireland unless perhaps you have a Boutique high yield property.

  1. Select the property
  2. Secure finance
  3. Buy it.
  4. Doll it up. Repair it.
  5. Pay rates, taxes, stamp duty etc.
  6. Insure it.
  7. Repay the finance.
  8. Advertise it
  9. Review candidate tenants - due diligence.
  10. Select candidate, contract the deal.
  11. Secure deposits etc.
  12. Monitor the tenant & frequency of rental income.
  13. Deal with Tenants & their foibles.
  14. Property routine maintenance.
  15. Property extraordinary maintenance / damage.
  16. Declare it & file it & pay it.
  17. Rinse & repeat when you have a change of tenant.
  18. & so on.
All for let's say 6% - 10% yield - why on earth would one take on that burden? I don't know.
Your time & mental health has value too, so put a number on that & net that off your yield number too. I personally just can't make the business case.
 
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galway_blow_in said:
Whether yields need to be double digit is of course a different matter ?
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German ten-year yields are over 2% now, they were below zero a year ago.

So the risk-free benchmark you should compare against is around 200bps higher.

But I have no idea what your risk appetite is so whether an investment represents value is totally up to you.
 
Horatio said:
We looked at property for rental over the last few years both residential & commercial & basically concluded that it's simply not worth the candle in Ireland unless perhaps you have a Boutique high yield property.

  1. Select the property
  2. Secure finance
  3. Buy it.
  4. Doll it up. Repair it.
  5. Pay rates, taxes, stamp duty etc.
  6. Insure it.
  7. Repay the finance.
  8. Advertise it
  9. Review candidate tenants - due diligence.
  10. Select candidate, contract the deal.
  11. Secure deposits etc.
  12. Monitor the tenant & frequency of rental income.
  13. Deal with Tenants & their foibles.
  14. Property routine maintenance.
  15. Property extraordinary maintenance / damage.
  16. Declare it & file it & pay it.
  17. Rinse & repeat when you have a change of tenant.
  18. & so on.
All for let's say 6% - 10% yield - why on earth would one take on that burden? I don't know.
Your time & mental health has value too, so put a number on that & net that off your yield number too. I personally just can't make the business case.
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Much of that doesn’t apply to commercial property investment where the vast majority of leases stipulate that the tenant is responsible for all repairs
 
NoRegretsCoyote said:
German ten-year yields are over 2% now, they were below zero a year ago.

So the risk-free benchmark you should compare against is around 200bps higher.

But I have no idea what your risk appetite is so whether an investment represents value is totally up to you.
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My instinct is that in the current environment, yield probably needs to be around 8% , if a tenant turns rogue, yield becomes irrelevant but that could happen with 4 or 14%
 
galway_blow_in said:
My instinct is that in the current environment, yield probably needs to be around 8% ,
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Again far from an expert but with a casual eye on my home town over the last 30 years I'd say vacancy in small industrial units is something like 25%, retail 10%.

Small industrial units are just a different proposition in risk terms from a retail premises on a main street with a tenant like a pharmacy for example.

I would assume they would attract very different yields.
 
NoRegretsCoyote said:
Again far from an expert but with a casual eye on my home town over the last 30 years I'd say vacancy in small industrial units is something like 25%, retail 10%.

Small industrial units are just a different proposition in risk terms from a retail premises on a main street with a tenant like a pharmacy for example.

I would assume they would attract very different yields.
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Interestingly enough perhaps, logistic space is most in demand right now in the commercial space

The property I’m referring to is a sandwich bar in a city ( not Dublin or Cork )
 
noproblem said:
What yield would you have if the commercial rent payee went belly up?
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galway_blow_in said:
Same yield one imagines if a residential tenant decided to cease paying

Anything constructive to add ?

It’s a rather reductive question
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Commercial tenants can be evicted much more easily for non payment than residential tenants.

The tenants ability to pay, is a more complex issue in a commercial lease. In a residential lease if a tenant stops paying its their home that they are putting at risk (even eviction is very difficult). In a commercial lease if the business isn't making money, they may decide to just not pay every few months, sure you can evict them, but maybe they will pay next month, and that might be easier than trying to find a new tenant.

Finding new commercial tenants can be a slow process, the right tenant doesn't come along everyday. Year long voids are not unusual.

Commercial property talks about the 'strength of the covenant', the clients ability to pay, how well drawn the contract is ,any personal guarantees.

A yield is a yield, 7% is a good yield today, that doesn't mean the tenant is good, don't mix up the two issues.

Are there provisions for rent reviews in the contract. Inflation may eat away at the rent, todays rent may be very little in 11 years time.
 
cremeegg said:
Commercial tenants can be evicted much more easily for non payment than residential tenants.

The tenants ability to pay, is a more complex issue in a commercial lease. In a residential lease if a tenant stops paying its their home that they are putting at risk (even eviction is very difficult). In a commercial lease if the business isn't making money, they may decide to just not pay every few months, sure you can evict them, but maybe they will pay next month, and that might be easier than trying to find a new tenant.

Finding new commercial tenants can be a slow process, the right tenant doesn't come along everyday. Year long voids are not unusual.

Commercial property talks about the 'strength of the covenant', the clients ability to pay, how well drawn the contract is ,any personal guarantees.

A yield is a yield, 7% is a good yield today, that doesn't mean the tenant is good, don't mix up the two issues.

Are there provisions for rent reviews in the contract. Inflation may eat away at the rent, todays rent may be very little in 11 years time.
Click to expand...
Tenant in question here has four restaurants, franchise operator
 
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