8 New Insights to purchasing Commercial Property

What you need to understand when purchasing Commercial Property

Purchasing Commercial Property

8 Insights to purchasing Commercial Property

1. Understand Your Purchase Motivation 

We often act for clients who are purchasing commercial property.

The motivation behind purchasing commercial property can be as diverse as the clients themselves. However, we believe that you can group purchase motivations into 2 broad categories:

    1. Investors – those looking to secure financial returns on an existing property
    2. Occupiers – those looking to secure a business outcome from an existing or proposed property (secure the premises they currently operate from, or, reconfigure, build, develop premises to operate from or relocate to, or)

Your Purchase Motivations Drive’s your Strategy and Analysis

If you are an investor, you are likely to be more focused on the possible return to be earned on the commercial property in terms of its rental income and its capital growth, and on the possible risks arising from owning the commercial property.

If the commercial property is tenanted, you are likely to consider the quality of the tenant, the lease tenure and terms, the existing contract rent the property is achieving and the likely cashflow the property will achieve at the next rent review.

If the commercial property is vacant, how easy it will be to rent, how long it will take to rent, what incentives you need to offer, and likely market rental.

For the business owner / occupier, the key consideration will be finding a commercial property that suits the requirements and specific circumstances of your business.

Your business premises may need to be close to key infrastructure, major suppliers or customers. It may need certain electrical requirements to operate equipment, specific floor loading capacities for racking, space for vehicle movements. If the business is in expansion mode, the property may need to offer room to grow.

Your focus will be on assessing the risks and potential to use the existing commercial property for your business objectives, the costs of doing so and the potential long-term savings to your business.

2. Understand your Purchase Decision Framework

Whether you are purchasing commercial property as an investor or as an occupier, while your purchase decision framework may be the same, there is a very subtle difference in your strategy, the analysis required, and your purchase assumptions.

We can demonstrate this by walking through a typical purchase decision framework and noting the subtle differences between purchasing for investment vs occupation.

3. Understand the Property Market / The Location / The Property

When purchasing commercial property, we recommend adopting a three-tier research approach to understand:

    1. The wider Property Market and its economic drivers and cycles;
    2. The Location and its demographics, profile, infrastructure;
    3. The Property and its condition, services, accessibility, constraints and opportunities.

This research combines Market and Location Research with Property Due Diligence.

Due Diligence aims to assess the key issues that impact the value, use and redevelopment potential of the commercial property you seek to acquire.

It also enables you to price property risks into your purchase price, minimise the operational and financial risks downstream of your purchase, and decide whether to proceed with the purchase or walk away.

You can phase the Due Diligence process to minimise transaction risks and costs:

    • Pre-deal evaluation to confirm that the commercial property meets your acquisition criteria and estimate purchase value
    • Post-contract evaluation to analyse the commercial property in detail and confirm purchase value

4. Understand Your Vendor

A vendor’s motive or objective for selling will directly impact their price and transaction expectations.

For instance, different objectives will drive the property sale from a listed entity compared to a private individual or family trust.

If the vendor wants to maximise the sale price, they may be willing to accept a conditional offer with a longer settlement. If they are looking for certainty and a faster transaction, they may be willing to forgo a maximum sale price.

5. Understand What Type of Purchaser Would be Interested in the Property

The type of purchaser attracted to a property impacts demand and competitive tension.

Investors are likely to shy away from a purchase that requires additional investment or effort to realise value. 

Developers will be deterred where there is a premium due to the existing onsite investment value or constraints on future use.

Owner-occupiers will only express interest if the property can accommodate their business or activity use.

6. Understand Your Purchase Levers

The three levers a purchaser can use to get to the negotiating phase of the tender are:

    1. Price
    2. Terms and Conditions
    3. Settlement Date

The vendor’s motives and objectives will drive the weighting of price vs conditions vs timing.

 7. Understand Your Purchase Strategy

Background knowledge and comparative sales research combine to provide an informed view of your tender bid price and strategy.

For instance, if the vendor wants to maximise the sale price, they may be willing to accept a conditional offer with a longer settlement. Or, if the vendor wants certainty and a faster transaction, they may be willing to forgo a maximum sale price.

In some commercial property transactions, we have submitted two bids and let the vendor choose their preferred approach:

    1. A low price and unconditional tender offer
    2. A higher price and conditional tender offer.

Typically, the purpose of the tender process is to receive all serious offers by a set date. Once tender submissions are received, there is usually a post-tender negotiation phase, especially where multiple offers have been received.

8. Understand Your Exit Strategy

To help frame your purchase price you should understand your exit strategy, or, value realisation plan.

If and when you sell your commercial property, how you will recover your capital investment, how easy will it be, and what is the likely delta between your proposed purchase price and your possible sales price?

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