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Why your commercial tenant can matter as much the building itself
That imbalance is where a lot of investors come unstuck, because in commercial property, your income is only as strong as the business paying you rent.
A long lease to a financially sound tenant in the right location is worth paying for, and conversely, a short lease to a struggling business in the same building is worth far less, regardless of the price paid for the asset.
What’s important to note though, is that the vacancy risk in commercial property is materially higher than in the residential market.
When a residential tenant leaves, a landlord can generally find a new one within weeks, even if an adjustment to the asking rent is required.
In commercial property, finding the right business, negotiating a lease, and completing a fit-out can take months, and if the market is soft, it can take considerably longer.
The most effective way to manage that risk is to choose the right tenant in the first place.
What to look for in a commercial tenant
The ideal commercial tenant is an experienced operator with a demonstrable track record, a sound financial position, and an operational need for the property they occupy.
An ASX-listed company, a large multinational, or an established business with a long operating history represents a fundamentally different risk profile to a start-up or emerging business seeking a lengthy rent-free period to get their operations moving.
These smaller businesses can often arrive with levels of optimism that are not always reflected in their balance sheets, so it is important to not let enthusiasm or a desire to fill a vacancy quickly to cloud your judgement on the fundamentals.
The tenant’s relationship with the property itself also carries significant weight.
A business that has operated from the same site for decades, invested in purpose-built infrastructure, and integrated the facility into its broader operations network is less likely to move, because of the high costs of switching.
Lease terms themselves are equally important. Rent review mechanisms, outgoings obligations and renewal options all shape the value of your income stream over time.
A lease with fixed annual rental increases compounds your income in a predictable way, while one without them does not.
When assessing a tenant, aim for an excellent one, rather than the ‘perfect’ tenant.
Scrutinise the business model, check the financial history where possible, and understand why they want your property and what it would cost them to leave.
The Westbridge Moorabbin Property Fund
The Westbridge Moorabbin Property Fund offers investors a single-asset opportunity underpinned by one of Australia’s most established industrial tenancies.
The fund’s underlying asset at 7-31 Keys Road, Moorabbin, is leased to ASX-listed Amcor, a global packaging leader with a market capitalisation of approximately $26 billion, operating across more than 40 countries.
Amcor has maintained continuous operations at the site for 40 years, investing significantly in the machinery and infrastructure that makes this property integral to its Australian operations network.
With a weighted average lease expiry of 7.33 years and fixed annual rent reviews of 3.5 per cent, the income is growing over the lease period.
Located just 19 kilometres from the Melbourne CBD within one of its most established infill industrial precincts, the 32,855 square metre site carries an underlying land value estimated at 85 per cent of the acquisition price, providing strong capital support beneath the income stream.
The Fund targets a monthly income distribution of 7 per cent per annum and an IRR of 12 per cent per annum net of fees*.
The Westbridge Moorabbin Property Fund is open to wholesale investors with a minimum investment of $100,000. To learn more, visit westbridgefunds.com.au
This information has been prepared by Westbridge Funds Management as a general guide only. It should not be relied upon to determine or to make decisions about the investment objectives, financial situation or individual needs of any person. Westbridge Funds Management recommends investors seek professional advice before making a decision to invest. Westbridge Funds Pty Ltd ABN 33 652 852 214 AFSL 533936. Westbridge Asset Management Pty Ltd ABN 48 151 957 676. Westbridge Property Securities Ltd ABN 28 091 623 862. AFS Licence 238386. Refer to T&Cs at westbridgefunds.com.au.
