Understanding the commercial investment property cycle

Just like businesses, investment properties also transition through cycles.

A prudent property investor will plan for, and manage, the various challenges and opportunities at each phase — from acquisition, through to sale.

At Harmony Property Investments, our business is about finding the ‘right’ commercial investment opportunities, proactively managing these properties through their investment term, and delivering consistent annual returns for our investors.

Harmony Cavan, purchased in 2013, is one of our investments which has recently transitioned into a new phase of its investment cycle.

The property has delivered returns of more than eight per cent per annum over its initial investment term, during which time it was fully leased to Target.

With the previous tenant vacating in late 2021, and investors choosing to extend the investment term after a repositioning of the property, Harmony Cavan has now welcomed two new high-profile tenants taking on long-term leases — online retail giant Amazon, and growing furniture and homewares store, Living by Design.

Find out how Harmony’s team of property professionals managed this transition, helping to set the property up for continued success into the future.

Acquiring Harmony Cavan

At the time of purchase, Harmony Cavan was leased to Target Australia, who had purpose-built the facility as their South Australian operations and distributions base.

Harmony considered the property a compelling investment opportunity noting the high-quality construction, location and attractive long-term lease covenant for a further 8.75 years.

The property presented in excellent condition, and was considered a favourable site for a broad range of users, particularly logistics operators. Additionally, there was further development scope should a bigger facility be required.

“When we set up Harmony Cavan in 2013, it was a single-tenanted property leased to Target Australia,” said Carol Olsen, National Portfolio Manager with Harmony Property Investments.

“In around 2015 Target changed their business operations and subleased the property to CTI Logistics.”

While this was not ideal news for the syndicate some two years after purchase, it gave Harmony time to consider the future of the property, beyond the lease term to Target.

“Pragmatically, we understood that by 2021, Target would be unlikely to renew their lease.

“This provided us with an opportunity to make a considered judgment on managing the investment while also preparing for its future beyond the existing lease expiry.

“Because the characteristics of the property were strong — it was modern, offered future potential to create multiple tenancies or extend the warehouse, and was well-located — we knew we could attract tenants again for those reasons,” Carol said.

The re-leasing strategy

As with all Harmony Property Investments, the Harmony team undertook rigorous research before acquiring the property and knew that attracting future tenants would involve understanding the market at the time, and presenting the property’s attributes to prospective tenants.

“The property is located in Cavan, an inner-north suburb of Adelaide known for being an industrial distribution and logistics hub, with good access to major transport routes,” Carol said.

In 2016, some five years out from lease expiry, implementation of the re-leasing strategy for Harmony Cavan commenced.

The strategy focused on a prudent financial and investment management plan, aggressively paying down debt and preparing for potential vacancy and the likely costs of re-leasing.

“Developing a re-leasing strategy for Harmony Cavan provided a good opportunity to consider different avenues to secure the best outcome for the property itself, as well as strategies and ways to possibly retain our sub-tenant, or decide whether to take the property to market.”

Upon receiving notification that the sub-tenant would be vacating, an off-market re-leasing campaign was launched in late 2020.

However, thanks to strong demand, no formal marketing campaign was required, said Daniel Robinson, Investment Manager with Harmony Property Investments.

“We had some really strong interest in the building, thanks to its location, the quality of improvements and access.

“More than 15 groups looked at leasing the property, together with interest from owner occupiers about prospective purchase.

“It became increasingly apparent there was strong demand from logistics users in the market, particularly in the 3,000 to 5,000 square metre range.

“With the building being over 8,000 square metres, we decided to take the considered risk of subdividing the building and leasing to multiple tenants, knowing this would involve significant building separation works together with modifications to all of the site’s services,” Daniel said.

The successful tenants secured in 2021 were Amazon and Living by Design, who have both signed long-term leases.

“In splitting the building for multiple tenancies, we have not only secured two excellent tenants, we have also re-positioned the property by way of ensuring the building services are now configured for more than one user,” said Daniel.

“This added functionality will further future-proof Harmony Cavan as it commences its second investment term with us.”

Welcoming new tenants

The successful re-leasing campaign meant that Amazon and Living By Design were secured before the expiry of Target’s lease term, reducing the property’s risk profile.

“We worked very hard to secure two new tenants prior to the expiry of the current lease term,” said Carol.

“There was no vacant period between the existing tenant moving out, and the two new tenants moving in, and no downtime in the rent.

“Furthermore, the profile of the property is now more diversified as the building is now leased to two different tenants.”

Amazon is using the property as a delivery hub for its Amazon Flex platform — a direct to consumer delivery service for its packages.

The property was chosen for its location, said Amazon Australia’s Director of Operations, Craig Fuller.

“Building infrastructure closer to where our customers live makes deliveries more efficient, so the opening of the delivery station in Cavan will enhance delivery speed for customers in Adelaide.”

The other half of the building is leased to Living by Design, a local furniture and homewares business.

Thanks to significant business growth over the past 24 months, Living by Design leased the premises to store more stock locally, in order to meet growing customer demand.

“Living By Design were seeking a site to consolidate their warehousing in SA,” Daniel said.

“They were seeking a well located facility to expand into, as they expanded their business.”

The cycle continues

With both new tenants now operating from the site, Harmony Cavan has now been reset from a leasing perspective, and investors continue to enjoy solid returns yet again.

“By agreeing to extend Harmony Cavan for a further investment term, our investors will receive a return on investment of nine and a half percent per annum for the foreseeable future,” said Daniel.

“Typically, a return at this level is a better return than what is currently available for new property investments, and our investors are very happy with this.”

Harmony Property Investments, exclusive to MRS Property, has provided its clients with independent commercial property investments since 2003.

To learn more about Harmony Investments, visit our website, or contact us today.