10 smart ways to avoid strata trouble
Tuesday, 18 March 2008
Last Updated: Tuesday, 18 March 2008
By Michael Laurence
Investment in strata offices, shops and factories can be a wild, profitable ride – but there are safety measures you can take to iron out the bumps.
SME owners wanting alternative property investments to residential properties or sometimes-volatile listed property trusts may be tempted to invest in small commercial properties. But take extreme care; this is a high-risk sector with plenty of traps for the uninformed.
The investment prospects of a quality strata office in an excellent location and with a solid, long-term tenant are far superior to, say, a small factory or corner shop of secondary quality. This is a widely diverse market.
Although strata offices, retail and industrial real estate are under the broad umbrella of small commercial properties, each has its own investment characteristics.
Quality strata offices are currently the pick of the small commercial properties, but would-be investors should still be cautious with that segment of the market.
Vanessa Rader, national research director for property consultants and valuers LandMark White, says the best strata offices in the CBD and main non-CBD centres are benefiting from a spill-over effect of the severe shortage of vacant space in the top office towers across Australia.
As rents rise and available space continues to shrink in the major office buildings, Rader says demand is spilling over to quality strata offices. “The market for prime strata offices is looking pretty good,” she says. But Rader does not expect the spill-over demand to trickle down to poorer-quality strata offices.
Rod Cornish, head of property research for Maquarie Real Estate, underlines the sheer shortage of all categories of office space, including strata. “The vacancy rates in Perth and Brisbane are the lowest since records began to be collected 30 years ago. Melbourne is at the lowest for 18 years, and Sydney is at the lowest for five years.”
Rader says vacancy rates for all types of office properties (including strata) in Melbourne, for instance, have hit 4.4% of total office space, and 3.7% in Sydney. A vacancy level of 7% to 9% is considered desirable for the smooth change-over between tenants.
“A key is that there is not a lot of supply in strata offices becoming available across Australia over the next 12-18 months, and vacancy rates will remain reasonable low,” Rader says.
There is, however, somewhat of a paradox occurring regarding all types of office space, from the CBD towers to suburban strata offices, that would-be investors should carefully note.
On one side, high demand and a shortage of space are pushing up rents. But on the other, the global credit squeeze is forcing up interest rates and making finance harder to obtain.
The bottom-line is that despite the growing rents, higher interest rates will lead to buyers expecting some easing of prices for buildings and strata offices in order to make an adequate return on their investments.
Cornish expects the reduction in prices to be most pronounced among properties of secondary quality with poorer quality tenants. “Offices [in the top office towers] with prime corporate tenants have secure cash flows,” he says. Any strata offices with less than first-rate tenants could be more vulnerable to their prices being driven down. (An additional factor is that offices of secondary quality are more likely to be affected by any slowing of the economy.)
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