With commercial property landlords enjoying returns of up to 12%, it makes sense there would be more risks and work involved. We’re talking about commercial properties such as office suites, shops, factories, warehouses, restaurants or hospitality venues, even car parks, etc.
Exposed to economic changes
The landscape for commercial leasing is changing due to the economic uncertainty brought about by the pandemic and accelerated digital transformation of the business sector. As we’ve seen, economic slowdowns tend to affect the retail and hospitality sector first, followed by the transport, distribution and manufacturing sectors.
Professional services consultancy KPMG predicts tenants and landlords will increasingly collaborate to shape and deliver the future of work. Its survey of senior decision-makers from the nation’s largest commercial tenants found that two-thirds of them expected landlords’ roles to change by 2026.
On the cards are demands for more workplace data and analytics, plus greater interest in coworking spaces. As well, the Reserve Bank expects remote working arrangements to stay higher in the long term than before the pandemic, as organisations look to a ‘hybrid’ in-office and home-working model.
Higher risk of vacancies
Those changes impact leasing rates. Currently, vacancy rates for prime offices in capital cities are still high compared to pre-pandemic. They range from 8.2% (Melbourne) to 13.6% (Perth), according to Statista. Meanwhile, the Property Council of Australia shows that the vacancy rate for the Sydney CBD office market overall was just 4% of pre-COVID levels in August. As for retail property, vacancy rates rose from 3.7% in 2019 to 12.9% by early July, according to commercial real estate advisory CBRE.
Factor in trends in vacancy rates and CPI to see if a rental increase is warranted or not. But also check your state or territory’s latest regulations – in NSW, for example, retail and commercial landlords can’t increase rent before 13 January next year. And if you’ve reduced your tenants’ rent due to COVID-19 between 1 July and the end of this year, you could be eligible for land tax relief in that state.
While a commercial property might look good today, local government zoning changes from commercial to residential, for example, could throw a spanner in the works. Check for infrastructure projects, such as railway lines, shopping centres and freeways, on the drawing board as they could be a drawcard for tenants in the long term. Also, look for similar commercial premises up for lease or even new development applications listed, which will make your job of attracting a quality tenant trickier.
Commercial properties can be costly to maintain
Depending on your agreement with a prospective tenant, commercial landlords may need to fork out thousands of dollars for fit outs to get their properties up to scratch for leasing. They may also need to do this to meet council regulations for their intended purpose. That would include chemical treatment facilities, medical centres and child or aged care facilities, for instance. If tenants are paying for the fit out, you’ll be expected to offer them rent-free time before they can move their business in.
You might be out of pocket if the building is getting to the end of its leasable life. As well, commercial landlords may need to keep common areas maintained to a high quality. Ideally, before signing a lease, you’d work out who’s responsible for repairs, including electrical, plumbing, mechanical and safety.
As a retail landlord, for example, you may have these expenses:
- Rates and land taxes
- Levies and charges if the property is under strata, community unit title, etc.
- Cleaning, caretaking, security, traffic regulation
- Management, administration and marketing
- Indoor and outdoor gardening and landscaping
- Supplying maintaining, repairing and replacing services.
Bringing in expertise for risk management
With each state and territory having different tenancy laws, chances are you may have a team of experts helping you buy and look after your commercial property, including a:
- Commercial mortgage broker
- Legal adviser
- Commercial buyer’s agent
- Property manager.
They are crucial elements of your risk mitigation strategy and so is commercial property insurance.
Commercial insurance comes into play when there’s damage to your physical property, such as due to weather, fire, or theft, rather than an economic downturn. As the landlord, you’ll be protecting the premises itself, not the fixtures, fittings or the fit out, if your tenant’s builder made those changes.
Typically commercial landlord’s insurance covers:
- The commercial property – repairs, replacing the property if damaged by flood, fire, storms, or the tenant
- Loss of rent if a tenant has moved on or while repairs are underway
- Theft of your fixtures, fittings or furnishings on the premises
- Plate glass broken deliberately or accidentally
- Legal liability if a third party is injured or their property is damaged
- Machinery breakdown
- Business interruption to cover rent if a property (damaged in a natural disaster) can’t be repaired promptly.
We can guide you on protecting your risks for your commercial property with customised cover.