13 May 2019

High-quality commercial properties offer significant and reliable returns to investors.

They provide fixed-term leases and potential capital stability with tax benefits and, if you invest in one of our unlisted property funds, quality cash flow without the share market volatility.

But choosing the right commercial property is crucial to the success of the investment. In order for us to purchase a property that will perform well over the long term, it needs to meet a series of strict criteria.

When KM Property Funds is assessing new commercial property opportunities, we take all of these factors, and more, into consideration.

But as an overview, here are a selection of the main areas we focus on:

1 Tenant profile

The profile of tenants, and their ability to meet their rent requirements, is extremely important, which is why we generally seek out properties that are leased to government, semi-government or top 100 ASX-listed companies.

Our current funds are an excellent example of this. 333 Exhibition Street, is a six-storey commercial office building tenanted entirely to the University of Melbourne, while The Stables Property Fund offers reliable and secure investment in The Stables Shopping Centre, which is anchored by a Woolworths tenancy. NewActon East Property Fund, meanwhile, is tenanted to the Australian Competition and Consumer Commission. Most recently, KM Property Funds established a new fund with two properties leased to Westpac Banking Corporation and Hydro-Electric Corporation, which is a state government owned business enterprise.

Understanding the source of the investment income profile helps us assess the risk of future contracted rents. Furthermore, establishing a strong ongoing relationship with our tenants is a fundamental driver and goal for the successful outcome of our investments.

2 Location

Choosing a suitable location is another important factor as it determines the calibre of tenant you can attract and the level of demand for the tenancy.

Typically, CBD locations are premium and in high demand, but there are many different business districts in each city and it’s important to understand the forces that drive each precinct.

Sydney, for example, has a range of 'business districts' outside of the city, including Chatswood, Parramatta and North Sydney and demand for these precincts is influenced by different factors. Suburban locations, close to tenant’s workforce and where rents are more affordable, can also be an attractive investment opportunity for the right property which has long term strategic value for ongoing tenant occupation, or redevelopment for a higher and better use.

For retail property, we undertake demographic and competitive analysis to ensure that the tenant’s service is the right fit for the location.

3 Risk assessment

When assessing an investment, the forward planning and risk assessment that accompanies it takes into account current leasing arrangements and forward looking assumptions to ensure that we have factored in lease expiries with appropriate provisions to retain the tenant, or to secure a new tenant. Forecasts also allow for expected capital expenditure requirements as assessed by independent experts.

4 Financing

Finally, the finance of a commercial property investment must be structured correctly. Securing the appropriate finance for an investment is critical, as is being aware of the loan covenants (for example loan to value and interest cover ratios) and borrowers' obligations.

In summary, there is no one vital element that will make a commercial property fund perform better than others. Rather, it takes a comprehensive approach and an adherence to a number of proven fundamentals to make it a successful investment.