The Brief

The client was a professional based interstate who had received a significant windfall and wanted to deploy it into commercial property.

The risk in that brief is not the capital. It is the entry point. A first commercial acquisition at $6.5m skips the learning curve entirely — the buyer arrives at a scale where a leasing failure or a structural surprise is material, without having previously owned anything that taught them what those look like.

So the priority was an asset where the downside was held by something other than the client’s judgement.

What the Passing Yield Concealed

The asset presented as a 5.5% net industrial investment. Unremarkable, and on that number alone we would not have recommended it.

Two things sat underneath.

It was bought at land value. The price approximated the value of the site alone, which means the concrete tilt panel warehouse standing on it contributed nothing to what the client paid. That reframes the risk entirely. If the building were destroyed tomorrow, the client would still hold the value they paid for. The improvements became upside rather than exposure.

It was under-rented. The passing rent sat below market, producing a reversionary yield above 6.5% within 18 months. The 5.5% was a temporary condition of the tenancy, not a characteristic of the asset.

The site coverage was 37%, which in a corridor where land is the constrained input is unusual. Low coverage means the building footprint can be extended, lifting income without acquiring more land. We did not pay for that and we did not put it in the numbers. It is optionality that came attached to a site we wanted anyway.

How We Underwrote the Reversion

The reversion is the part of this case that deserves scrutiny, because it is the part that is not contractual.

A market review is an outcome, not an entitlement. If the market softens, the review may deliver less than expected or nothing at all. And a tenant of almost twenty years paying below market has become accustomed to that rent — a correction to market can be the thing that prompts them to test relocating.

We assessed it accordingly. Achieved rents on genuinely comparable stock in the corridor, not asking rents. The tenant’s fit-out, racking and operational integration into the site, and the realistic cost to them of moving after two decades. What the building would re-let for if they did leave, and how long that would take. The acquisition needed to work if the reversion arrived late or partially — and at land value, with a long-standing occupier, it did.

The Outcome

A concrete tilt panel warehouse on a significant landholding in Melbourne’s northern corridor, acquired at circa $6.5m — at land value — leased to an occupier of almost twenty years, on a 5.5% net initial yield reversionary above 6.5% within 18 months, with 37% site coverage allowing future expansion.