Chasing a strong yield, and disappointed with the performance of the residential market, Daniel Prowse and his wife turned to a unique commercial property to round out their portfolio. It may be raking in the cash now, but could it prove to be a ticking time bomb?
"Looking to consolidate our property portfolio, we turned to a commercial investment opportunity in Sydney’s Hills District.
We were chasing a strong yield, having had mixed experience with our previous residential investments. While our investments in Sydney and Toowoomba have continued to give a decent cash flow, our properties in WA have not been as forgiving.
We bought in Orelia and Cooloongup, both within the Rockingham area of WA.
We were working on the basis of the two areas eventually becoming Perth’s equivalent of Sydney’s Blacktown or Campbelltown, expecting decent cash flow in the short term and some capital growth in the medium to long term.
With the Perth market suffering as it has, our yields have taken a tumble. The Orelia property, initially rented out for $420 a week, had to be dropped to $370.
The market for rent has done a massive backflip – there’s a flood of listings and prices have taken a real dip. We’ll hold both of the properties for the long term, but the drop in yield has certainly frustrated the direction of our portfolio.
So with this next purchase, we had totally different priorities. We wanted a net yield of around 8 per cent and we wanted a long period of security.
We found both with our next investment in Baulkham Hills in Sydney.
It’s a commercial unit in a big block – but here’s the twist. A major gym chain has leased out 60 or 70, over two or three levels, of the units together to form a massive floor space for all of its equipment.
It’s quite weird walking inside, because you own a square block of the floor space. So it might be a dumb bell area or something – there’s no actual definitive ‘here’s your office block, here’s yours’. It’s almost akin to owning shares in a building in that sense.
For now it’s secure: it’s leased for the next 10 to 15 years. It’s positive cash flow with an eight per cent net yield and there’s absolutely no hassle in terms of maintenance or tenant requests.
But there’s a big risk at the end of it.
If the gym doesn't resign the lease, there will be about 60 or 70 units that are all exactly the same that will come onto the market. That’s bad news for rental yields and bad news for property values, and something that you can avoid with most residential investments.
Although I was aware of all of this at the time, down the track there’s a lot of risk and concern with it and it is something that weighs on my mind.
We sought diversity after being burnt by our WA properties – now we just have to enjoy the strong yields and hope that our decision doesn't come back to haunt us."
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