Simple Rules You Must Follow in Purchasing a Shopping Centre

By John Highman

As an investor, you may want to purchase a property to expand your investment portfolio. You may also consider purchasing a retail shopping centre for the attraction factors you believe the property type provides to your existing property mix. 

Where do you start? Diversity is a good thing in property investment because it spreads the risk. Retail, office, and industrial property ownership can provide you with a ‘diversity plan’. 

Most investors like to hold their property assets for several years so the improvement in yield and value can start to take effect. Any investor should purchase a property with a plan in mind.

Using Local Property Advantage

Look around your town or city. You may know a retail property locally, and its location and then consider it worth investigating for investment. At that point, the research starts. There are things to get deeper into.

Understand that any retail property is typically complex because many tenants will be in occupation. With that, there will be the variables of leases and the customer and tenant use of the property. Therefore, a checklist approach is suitable when assessing any retail property and its opportunity for you as an investment.

Even in this changing property market, retail shopping centres are quite desirable as a purchase alternative for the experienced investor. However, how big should the property be? What stability do you need to satisfy your lenders? How much purchase price can you afford? Then, it is time to make some decisions.

Undertaking Shopping Centre Research

When proper research is undertaken, the future opportunities of the property are more apparent. So let’s help you start with some simple property investigation rules. 

You can add to this list as you move closer to your decisions; however, here is a ‘base plan’.

  1. Location – Start with the site as you can investigate essential issues with any selected property, such as zoning, customer demographics, competing properties, and vacancy factors. That information will give you the knowledge to start the fuller property review. Also, check out the local property zoning at the local council to see what changes and developments are occurring in the area. Finally, see if any new development plans are under consideration for the location.
  2. Property Design, Age, and Improvements – The older the property, the greater the chance of maintenance costs escalating. Retail properties are under the ongoing pressure of customer and tenant use. Those factors will drive maintenance costs up. Get a property history to understand how much the property maintenance costs could be per area unit. Also, ask about those costs over the last few years. Those numbers help you compare the subject property to the industry averages in the general location. Split out the more significant capital works as they are specially handled from a taxation perspective and are not ‘typical daily maintenance’. You may also like to consider the expected capital work required in the coming years. A qualified engineer is an expert to help you look at that estimate and the function of the essential plant and equipment for the building or overall property.
  3. Tenant mix and leases – With multiple tenants in occupancy, there will be an array of leases and licences to support the collected rent and the use of premises. Check the leases and other documents against the tenancy schedule to ensure no discrepancies. Have your solicitor look at those documents so you can see and prepare for known changes such as rent reviews, lease option negotiations, and vacancies. When you invest in a retail property, you invest in the future, and the lease documents and the tenant mix will provide you with the opportunity. Check those documents.
  4. Vacancy risk assessment – When you own a shopping centre, it pays to have an ongoing tenant replacement or retention plan active in your investment planning. You would generally like to keep some tenants in a property, while you may choose to replace others. Making decisions early with those tenants, setting rental expectations, and negotiating leases and any new or variation to occupancy is wise.
  5. Cash flow – Rents and outgoings give you cash flow. You may understand what market rent should be for the location and the property type, but you also have some decisions to consider regarding the kinds of rent you prefer in your property in moving ahead. Those rents apply to any new lease and the new tenant. Those rents can be net or gross and include some leasing attraction of an incentive. At this point, a shopping centre leasing strategy will give you the base rental targets for each part of the property and the new leases that may be required. Understand, of course, that there are differences in negotiating a unique rental for a new tenant versus a current tenant with a new lease. So prepare for the leasing differences.

So, these five factors will help you investigate the local property market and any interesting retail properties you believe could suit your purchase or investment plans. Use these items and make a checklist that you can expand on with other topics that are your priority.

John Highman
0417 221 108 |
Ray White Commercial Gold Coast
Shopping Centre Sales and Leasing Specialist

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