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Navigating Commercial Rent Assessments: A Guide for Real Estate Agents

When analysing a commercial or retail property for investment, rentals paid and received instantly come to mind as an essential factor to examine. There are many other critical things to explore, but the revenue stream tells the tale of the investment.

Examine the property and comprehend its history and future. This will be the investment story to share with any owners or occupiers. Let’s take a look at how to do a thorough rental evaluation, whether you’re an investor or a real estate agent. Then we can add some further assessments to that.

When analysing investment property rents, the basic concept is to start with today’s paid rentals, then move on to the property’s past and future. Then, you consider the real estate market and how it may affect the investment property.

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Evaluating the Property Market

When evaluating a market, consider the vacancy rate, as well as the availability and demand for investment property in the precinct, town, or city. Property markets are always changing, and understanding what is happening allows agents and investors to anticipate risk and predict profits.

So, what do you keep an eye on? These are the starting indicators:

  • Supply and demand for property
  • Prices locally
  • Enquiry for property types (investment or owner occupancy)
  • Upcoming and commenced new investment property developments
  • Rents by property type and location
  • Vacancy factors in a property
  • The quality of the lease documentation
  • The end of lease dates into the future
  • The quality of the tenants in occupancy

Property types and locations can always be compared. In addition, economic strains are present at the local and national levels. An increase or decrease in business sentiment will affect rental payments and occupancy issues in the property market.

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Rental Facts and Figures

So here are some rental categories to understand and track given property types and locations in your preferred territory.

Market rents:

This is the genuine market rent for the property type and location. As part of that assessment, it is critical to understand that the market rent was established through real-market discussions rather than an index or fixed percentage escalation.

The size of the property, the quality of the improvements, and the tenancy area will all impact the rents, so collect that information as you gather similar rentals for comparison.

Gross rentals:

This is the rental amount, which includes the property’s outgoings. Gross rentals are a popular rental calculation method for some agreements and renters. Tenants may want to pay a single rental fee to occupy the premises without incurring further costs or changes later in the year.

Nett rents:

This is the rental without any outbound components. Each renter would then pay their outgoings independently on a monthly or yearly basis, depending on the location and size of their buildings.

This form of rental calculation allows the landlord to recover growing outgoings on a tenant and premises basis. Nett rentals are often more advantageous to the landlord throughout the lease period. These rents can then be applied directly to a return on the property value, resulting in a yield for the investment property.

Face rents:

Face rates include any incentives granted to the tenant as part of signing a lease for the property. Experienced investors and agents would seek to detect and exclude these incentives from the yield calculation for the property’s sale price or value.

retail property planner on computer screen in office

Effective rents:

These are simply the rentals with the lease incentives subtracted. When measuring property valuations and returns, the goal is determining effective rentals.

Incentives for leasing:

Numerous forms of incentives exist, all involving money. Fit-out, cash, rent-free, and subsidised rent are some of the most prevalent incentive options. Tenants are offered incentives to sign a longer lease for the premises.

Ultimately, the landlord of any property would like to recover the value of the initial incentive by the lease’s conclusion. The incentive would be paid back in addition to the property’s effective market rent.

Occupancy costs, including outgoings paid by tenancy and unit area (per m2 or ft2):

Each property class will incur various expenses as part of the occupancy and leasing process. Some averages may apply to various property categories, such as office, industrial, and retail.

A skilled agent or investor will always examine a property’s outgoings to determine whether they are too high, average, or below trend. Outgoings expenditures may also be recoverable in part or entirely from tenants, therefore, examine the leases and recoveries in each occupancy scenario.

Rental Observations

It would be wonderful to believe that investment property rentals will always increase, but this is not true. Rents may fall or stall if the business community is under pressure or if there is an oversupply of space in new developments for the type of property in the area.

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