Industrial property is the entry point for many property investors to the commercial property industry. As a property type, industrial property is relatively straightforward with little complexity. The property owner needs to target and strategize the following issues when looking for a property to buy:
- Stable tenants
- Achievable rentals
- Good property location
- Industrial property precinct
- Growth of the local community and business sector
- Vibrant industrial community supplying services, products, and raw materials
- Access to transport links, ports, airports, and railheads
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So now let’s look at the industrial property needed today by tenants.
What do Industrial Tenants Need?
Traditional warehouses will include quality height, size, loading and unloading facilities, quality office space to support industrial operations, ample car parking for staff and customers, hardstand areas for operational flexibility, and high levels of security to protect the tenant’s goods and their operation. Today, Industrial tenants are far more sophisticated and demanding when selecting a property to lease or buy. Therefore, the investor should choose a property with all the elements of property usage that tenants expect in the local market. Tenants know that the property will impact operational costs and,d eventually, the bottom line of their business. Tenants will choose their property well as a consequence.
Taking the First Step to Investment in Industrial Property
Industrial warehouses are simple to construct and have a long economic life; investors see them as entry-level investment vehicles. Providing they select a sound and strong tenant and apply for a good lease, the stable future of the property for investors is normally achievable. Industrial property requires very little management, and as a direct result, many private investors manage it themselves. Unfortunately, this does have negative connotations, in that first-time investors sometimes have little awareness of the specialist terms and operational conditions supported by lease documentation on their property.
These first-time investors can then overlook critical matters and make mistakes. To the experienced commercial property specialist and commercial real estate agent, it is easy to see these ‘first-time’ landlord-managed properties as you drive through a town or city. The errors of ownership are visually obvious. These errors can even be reflected in the property’s ultimate rent and price level.
Invariably and importantly, this self-management problem will surface at the final sale or rent review time when the investor has overlooked something or transacted it incorrectly. Today’s buyers of property will conduct a due diligence period and investigation of any property prior to settlement.
Property owners who manage their own investments should do so only when and if they completely understand the complexity of the task at hand. If the investors have only a basic understanding of property performance and function, then they should not self-manage the property. The matter is plain and simple.
Critical property knowledge will involve key functional elements such as:
- Types of rental
- The lease clauses and provisions
- Property maintenance strategies
- Property operational costs
- Contractor management
- Vacancy resolution and strategy
- Incentive use and strategy
- Tenant negotiation skills
A good property solicitor is invaluable when it comes to Investment Property. The same should be said for a property-experienced accountant. Even the most basic industrial property needs lease documentation and financial guidance carefully prepared. Interestingly, many first-time property investors will sometimes choose cheaper lease documentation that is ‘generic’ and available off the shelf. Cheap is not a good option regarding documentation of investment property. You get what you pay for, so why would you take this risk?
Given that you are endeavoring to protect and stabilize cash flow, a few dollars saved on lease documentation preparation at the start of any occupancy can eventually lead to property instability or downfall, loss of tenant, higher property operational costs, and uncertainty when it comes to exercising the critical terms and conditions of the document ofthe lease.
A good property solicitor will understand the occupancy needs of the particular property and reflect that into the document used by the landlord to protect occupancy and cash flow. The same solicitor can create a standard lease document and strategy that targets the landlord’s cash flow plans and investment targets. You will not get this advantage from ‘generic’ leases.
Industrial Properties Outgoings Advantage
Many Investors seek to purchase and lease industrial property to major industrial businesses under long-term net leases. In these leases, these larger tenants would normally control and pay the property outgoings directly.
The property outgoings in an industrial property are normally., However, an essential checking process is needed to ensure the tenant pays the outgoings promptly. In many circumstances and in this market, we have seen some tenants avoid paying outgoings without the full awareness of the landlord. This then creates unnecessary fines and legal disputes for outstanding outgoing accounts. The landlord must not assume that the tenant has discharged or paid the outgoings; the landlord can later find that the matter is still exceptional and about to go to court for non-payment. Rates and taxes (statutory charges) are usually charged on the land and will ultimately fall on the landlord for payment.
S, while this process of tenant paying outgoings directly is convenient and simple for the landlord, such leases have little substantial increase in rental return, which may not necessarily support the investor’s growth plans. Investors of this ‘basic’ nature typically hold several properties of this type over the long term to allow them to achieve portfolio growth.
It pays to recognize that industrial property may be uniquely and especially suited to a particular tenant. This means that the vacancy threat in industrial property must be carefully monitored as any lease reaches the end of term. It is not unusual for industrial property to remain vacant for a lengthy period in the current market.
Mortgage Lenders and Industrial Property
Mortgage lenders for fully leased warehouses occupied on the long leases see them as good collateral for loans. Long-term financing is typically available for industrial investors at competitive interest rates. Industrial investors probably find it easy to refinance an expanding portfolio on the back of their established industrial and well-leased property.
The secret to success in industrial property investment is to have:
- Good leases
- Good tenants
- Good vacancy awareness and minimization strategies
- Sound recovery of property operational costs
- Good maintenance controls
- Good insurance strategies
- Minimal exposure to risk from the property is well-established and permitted to use and comply.
- Good income and expenditure budgets
Industrial property is the market segment that normally suffers early in an economic downturn. That is due to the close integration between the industrial business community and the consumer. Fortunately, the industrial property market responds quickly when the economy moves towards growth and stability. Landlords should respect this fact and monitor their way through downtime, as they will always come and go.
