Cachet attached to ‘vacant possession’

4:11 PM Friday April 6, 2018 Bayleys

Vacant possession means the seller guarantees the property will be fit to be occupied at a given time. Photo / Supplied

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 as 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 relatively low.

There are other advantages too. Because buyers aren’t inheriting someone else’s tenant and lease agreements, they can, from the outset, set terms that work best for them.

Campbell says the asset class is not without its challenges, though. With no tenant in place guaranteeing income, most lenders will require purchasers to have 60 per cent equity and insist on a higher level of due diligence.

“Ironically, the fact that bank funding for vacant possession units can be harder to obtain than for other asset classes, is one of the reasons they are at a more affordable price point. That’s a huge advantage for those who do have the equity available,” he says.

Most vacant possession industrial units coming to the market include a small office component and are between 200sq m and 1500sq m in size, but can range up to 5000sq m for significant industrial and distribution centres. Market activity is highest in established inner-city industrial precincts with good access to major transport routes and a wide range of facilities.

In Auckland, the introduction of the Unitary Plan has changed the fortunes of many small industrial fringe areas in inner city suburbs. The rezoning to Mixed Use has allowed owners the option to redevelop into higher worth properties. This has pushed demand for industrial units further south, north and north-west. The rezoning to Mixed Use could also help buyers reduce their overheads by turning part of a Mixed Use-zoned vacant unit into accommodation.

“Location – and by extension access to facilities and transport infrastructure – is a key determining factor in price,” Campbell says.

“The only challenge is shortage of stock. Buyers need to be market-ready with a knowledge of current market values. They must be able to identify any issues during the due diligence process so they can move quickly when an opportunity arises.”

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Scott Campbell, Bayleys