Cachet attached to ‘vacant possession’
Commercial property buyers are increasingly pursuing industrial unit properties that have vacant possession or short-term lease expiry profiles, says Bayleys’ national director industrial and logistics Scott Campbell.
“The turn to vacant possession comes as opportunities to acquire well-located prime assets with long weighted average lease terms with strong covenants are starting to shrink on the back of unprecedented demand within the industrial property market,” Campbell says.
“As an asset class, industrial property is dominating the investment landscape, accounting for around half of the $6 billion of commercial property transactions last year.”
While the term “vacant possession” seems relatively straightforward when talking about properties, it is actually a legal concept. It refers to a legal obligation which requires the selling party to guarantee that the property is fit to be occupied at that time or any other point of time.
Basically, selling a property with “vacant possession” means that the new owners can move in straight away or gain access to the property without having to wait for people to move out of the property.
Campbell says vacant possession units can represent great value and, for many, are an obvious first step in their entry to the commercial investment sector or the next step in expanding their current portfolio.
“They are seen an entry level asset class, and compared to other types of property, tend to attract a wider pool of buyer groups — from small investors and developers to family trusts and institutions,” he says.
“Owner-occupiers represent the biggest buyer group by far. Typically, they prefer vacant possession because of the power it gives them over the future of their businesses.
“For many small-businesses, the psychological advantage of owning property in a rising market cannot be understated.
“Ownership frees them from the stress of lease renewals and rent reviews, real pressure points when inflation rises.
“For investors, vacant possession units make sense in current market conditions, with tenant demand for well-located industrial space high and interest rates are relatively low.
Because buyers aren’t inheriting someone else’s tenant and lease agreements, they can set terms that work best for them.”
The asset class is not without its challenges, though. With no tenant in place guaranteeing income, most lenders will require purchasers have 60 percent equity and insist on a higher level of due diligence.
“Ironically, the fact bank funding for vacant possession units can be harder to get than for other asset classes is one of the reasons they are more affordable. That’s a huge advantage for those who do have the equity available,” Campbell says.