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Cat 299d3 xe land management price on the increase
It's been a bad few weeks for the commercial land management industry.
The market has been hit hard by the global slowdown, compounded by many key players taking the opportunity to re-evaluate their portfolio in order to maximise capital and shareholder returns. For the past two years our firm has been reporting negative cashflows from our management of commercial and industrial land - most of our activity is actually managed through the leasing of agricultural land - so the downturn has hit us very hard. In recent weeks we have had to take on a few new tenants in order to meet commitments to our shareholders, and in the case of the largest landowner in Western Australia, we are still finding it very difficult to get them to offer the right terms.
The bottom line is this: it is extremely unlikely that land will get cheaper over the coming months. In fact, unless we are able to find a way to get our land managers to increase their revenue and profitability, the market will tighten up significantly and it may well reach its lowest point in years.
While these sorts of comments are rarely popular, I want to address the two primary misconceptions I hear around the country, both from investors and landholders.
Firstly, we believe that commercial and industrial land is actually much cheaper than it was 12 months ago. This belief is wrong because the market has moved on - there are fewer large, new-build developments and more mature, profitable, established industrial complexes for sale.
But, secondly, we are hearing a lot of discussion about land prices, and it's a fair question: will there be an increase in the coming year? The answer is simple: land prices will continue to go down in the short-term as the market attempts to find the right balance between supply and demand, but will start to increase again as the tide begins to turn in the new years.
In the short term we are seeing the market adjust and the value of our land assets go up, as the value of other sectors of the economy rises. But, as the tide turns, and there are fewer new developments and more established, profitable land, the real estate sector starts to take back share of the market as it becomes more affordable to invest in.
What is an owner looking for in his or her new property? If you’ve been reading my blog over the past two months, you’ll know that I have been encouraging investors to consider buying quality-led, established sites for less. Well, it turns out that this is true. Land and property investors are searching for more established sites where they have more certainty. It’s been over 12 months since we took delivery on our first site, and since then we’ve purchased 11 new properties, with more of these sites expected to come to market in the coming months.One of our recent land acquisitions was a four hectare mixed commercial-residential property that we purchased from a large UK investor for £2.0m. The seller held off completing it and the property is still with us and in use.This is exactly the type of deal that we were looking for, and we would not hesitate to invest in sites similar to this again. But of course, with each property we have purchased, we have sought sites which are in a prime location and with plenty of appeal for new build. We believe that once we start building sites at a cost-effective level, we will see some spectacular returns.We have noticed that new build sites, when they come to market, tend to have a relatively short life-cycle, with sales rapidly becoming available. In these cases, the return on investment is very low. In the case of the sites we’ve purchased, we expect them to maintain high rental yields for quite some time to come.
In the next six to twelve months, we expect to see new build sites come to market at a rate which is more in line with what we have been seeing previously. We will not be discouraged by these rates, as we expect to be able to increase our portfolio of sites to at least 25 properties in the next two years. By 2018, we should see these yields begin to increase and, over the following five years, we would expect to see the numbers rise considerably.This does not mean that we expect to be involved in the new build market indefinitely, but it is our intention to grow the number of sites we are building to 25 before 2018. We plan to keep the rental yields on the sites we build as high as we possibly can, for as long as we are able to. I do not anticipate any of our sites to be short-lived. Rather, our aim is to increase the number of sites in our portfolio so that we can build some spectacular, long-term, high-yielding sites, which are ultimately more profitable than any other project type.
The first property we are thinking of acquiring will be a small, two bedroom, property, with a two-car garage and a price tag of approximately $180,000. We do not anticipate to be in any hurry to build this property. It is purely a site we would like to acquire.
There are a number of other sites we are targeting. However, for the purpose of being transparent about our intentions, I don’t think it would be appropriate to talk about those sites at this time.
Our next step is to establish a business plan. At this stage, we are still only planning our approach. We do not think we have to raise capital to do this.