How to find a commercial property with the X factor

The investments that offer the most value are those that require some problem-solving. Picture: realcommercial.com.au/buy

While most investors look to buy a commercial property with a long lease and no problems to solve, an increasing number want an investment with “X factor” – one that, with a little work, has the capacity to generate above-average income.

But how can investors find a commercial property for sale with just the right amount of “upside potential”? Is it about finding something with re-zoning potential? Or should investors look to completely re-develop a property? Should they always lease a commercial property to long-term tenants? What separates a “vanilla” investment from a diamond one?

It all comes down to market research, risk assessment, and problem-solving.

At least, that’s according to Adam Davidson, founder and managing director of Armadale-based Up Property (http://www.upproperty.com.au), who prides himself on identifying, acquiring and managing real estate that unearths this appealing upside potential.

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31 William Street, Paddington

Market research, risk assessment, and problem-solving are key to success in commercial property investment. Picture: realcommercial.com.au/buy

1. Find a commercial property for sale “that has a problem”

Davidson says would-be investors should look to buy commercial property with a problem that needs fixing.

“Potential can come in many different forms and often comes from buying a property with a problem to solve and being able to creatively and effectively solve that problem for a great outcome,” he says.

This differs from buying what Davidson calls “vanilla” investments – commercial properties sold with a long lease in place and little or no issues to solve.

“These types of properties usually provide a long-term, stable income and attract investors who want a ‘set and forget’ investment. They are often considered a lower-risk investment – although this is not always the case – and often there is limited ability for the investor to add any significant value, beyond normal market capital growth.”

2. Then do some homework

Market research is key to understanding what a commercial property can achieve, Davidson says.

He says one of the biggest mistakes investors make is not developing a strong enough understanding of the commercial property market, the sub-market fundamentals they are looking at, the current market cycle and some of the potential risks involved.

“It’s important to do your research, understand how leasing works and to evaluate the potential of the property you are investing in. Understanding and mitigating the risk is key.”

3. Work out how to solve the property’s problem

Next comes problem-solving.

Davidson says upside potential can come from being able to identify that the property’s income is below market value or that the property has a “higher or better use” and is well suited to being re-developed, renovated or rezoned.

These are often commercial properties that land in the “too-hard” basket for many. A case in point is Up Property’s recent redevelopment of 126-128 Little Malop Street in Geelong.

“With this project, we saw the potential to take what was a rundown, almost derelict 2000-square-metre retail building and transform it into a premium office asset, complete with a new facade, lobby and modern office fit-out,” Davidson says.

The building is now the long-term home of the Geelong Advertiser and Barwon Health, and is part of the regeneration of Geelong’s Market Square area.

2 Duke Street, NT

Sometimes it’s better to buy an untenanted property that needs renovating, as you’re more likely to find a better deal. Picture: realcommercial.com.au

Always get good advice

Davidson says a great way to gain a stronger understanding of the commercial property market is to learn from trusted advisors.

“This could be anyone, from friends who have invested before, lawyers, property experts and more. However, it is important to ensure you weigh up their advice and ensure they are indeed experts whose advice is valid.”

Be brave

Ultimately though, the best way to learn about commercial property is through experience and the best way to get that experience is to simply start, he says.

“Many people talk about investing in property, but take a long time to do so or never actually take the leap. Over time, what will separate you from the average investor will be an ability to form your own views on the market and where the market is going.”