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:
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
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 their operation.
Today’s industrial tenants are far more sophisticated and demanding when it comes to selecting a property to lease or buy. Therefore, the investor should select a property that has all the elements of property usage that tenants expect in the local market. Tenants know that the property will impact operational costs and 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
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Industrial warehouses are simple to construct and have a long economic life; hence, investors see them as an entry-level investment vehicle and popular. Providing they select a sound and strong tenant and apply a good lease, the property’s stable future is normally achievable.
There is very little management required on industrial property, and as a direct result, many private investors will manage the industrial property themselves. Unfortunately, this does have negative connotations. The first-time investor sometimes has 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 reflect in the ultimate levels of rent and price on the property.
Invariably and importantly, this self-management problem will surface at the final sale or rent review when the investor has overlooked something or transacted it incorrectly. therefore, the buyers of property today will conduct a due diligence period and investigate any property before settlement.
Those property owners that manage their own investments should only 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, they should not self-manage it. 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
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 carefully prepared lease documentation and financial guidance. It is interesting to note that many first-time property investors will sometimes choose cheaper lease documentation that is ‘generic’ and available off the shelf. However, cheap is not a good option when it comes to documentation in investment property. You get what you pay for, and 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 tools the critical terms and conditions of the document of the 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 long-term net leases, these larger tenants would normally control and pay the property outgoings direct.
The property outgoings in industrial property are normally simple. However, an essential checking busying process is needed here to see that the tenant is correctly paying the outgoings in a timely fashion. In many circumstances and this market, we have seen some tenants avoid the payment of outgoings without the full awareness of the landlord. This then creates unnecessary fines and legal disputes for outstanding outgoings 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 outstanding and about to go to court for non-payment. Rates and taxes (statutory charges) are usually a charge on the land and ultimately fall on the landlord for payment.
So whilst this process of the tenant paying outgoings direct 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 the property may be uniquely and especially suited to a particular tenant with industrial property. This means that the vacancy threat in the industrial property must be carefully monitored as any lease reaches the end of the term. It is not unusual for an 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. The industrial investors probably find it easy to refinance an expanding portfolio on the back of their established industrial and well-leased property.