Industrial or retail?
Wednesday, February 28, 2007/
Get rich by investing in industrial and retail property.
I am often asked by eager property investors which makes a better investment: industrial or retail property?
It is not an easy answer, especially when calculating yields, because the risks are not the same.
However here is a quick check list.
Most value in a retail investment lies in the land — in many cases as much as 85% of the value of the investment is the land and only a small proportion relates to improvements.
So, location location location certainly is key. The size and location of the land will be the strengths of retail properties and obsolete buildings shouldn’t rate as a big concern, because most premises can be routinely improved, and invariably at the incoming lessee’s cost.
A spot that attracts high pedestrian traffic will ensure the property stays occupied by a tenant and give you consistent income — other than during the most severe of recessionary periods.
On the other hand, the lessee often tends to be a small business with little financial strength and unable to commit to a long-term lease.
Industrial property value is calculated very differently. For a typical industrial investment, the building value makes up to 80% of the value of the investment, and land only 20%.
Building design changes often and popular locations come and go as the population grows and shifts, demographics change and new infrastructure such as freeways and ring roads spring up.
Design obsolescence is a major risk because land and location alone are not enough to guarantee long-term serviceability, as improvements become outdated.
On the up side, industrial does offer the opportunity, in a relatively lower price range, to do business with big organisations as lessees, and usually for terms up to 10 years.
So, ultimately it’s a question of risk and return.
Retail offers long-term low risk reliability because the value is in the land, not the premises, which demands maintenance. Industrial, despite the longer tenancies, carries much higher risk of obsolescence.
The faster depreciation for industrial properties means they must be amortised more quickly. So, on balance, you need to get a better yield from industrial properties to do the deal.