The Brief

The client was winding down their working life and moving capital out of residential investment. The requirement was income — passive, reliable, and sufficient to fund a lifestyle into and through retirement.

That last clause changes the entire specification. An asset bought for retirement income is not judged on the return it produces in a good year. It is judged on what it demands from the owner in a bad one.

Why the Higher Yield Was the Wrong Target

There was older industrial stock available at this price point paying materially more than 5.75%. On a spreadsheet, that stock wins.

It wins because the spreadsheet does not have a line for the roof.

Older industrial buildings carry deferred capital expenditure — roof sheeting, hardstand, electrical, compliance upgrades at lease renewal — and that expenditure does not arrive on a schedule the owner chooses. For an investor still earning, an unbudgeted six-figure capital call is an inconvenience. For an investor drawing on the asset to live, it is the income for that year. The yield difference between new and older stock is not free money; a portion of it is the capital expenditure the buyer will eventually fund themselves.

The second factor rarely gets weighted properly. A new building generates substantial depreciation deductions, and depreciation shelters income without reducing it. For a retiring investor whose taxable income is falling, the after-tax return on a new asset can compare very differently to the after-tax return on an older one at a higher headline yield. Depreciation is the most consistently ignored variable in industrial acquisition analysis.

We should be clear that the benefit depends on the buyer’s own tax position, and that is a question for their accountant rather than for us. What we can control is whether the asset generates the deductions in the first place.

What We Prioritised

Low intervention. A brand-new building, with the maintenance obligations and capital risk pushed a decade out.

Tenant essentiality. A wholesale bakery supplying and distributing to major supermarket chains nationally. What matters is not the covenant size but the nature of the operation: food manufacturing with production equipment installed, servicing contracted supermarket demand. That tenant is not relocating opportunistically, and the demand behind them is about as non-discretionary as it gets.

Main road frontage. Exposure matters less in industrial than in retail, but frontage broadens the pool of alternative occupiers, which is what protects you at expiry.

The honest limitation: this is a single tenant on a five-year lease with no occupancy history at the premises, and the fit-out is specific to food production. We were comfortable because the improvements are generic warehouse and office beneath that fit-out, and the site would re-let to a broad range of users. But it is a single covenant, and a buyer relying on the income should hold a reserve regardless of how new the building is.

The Outcome

A brand-new office warehouse with main road frontage, acquired at circa $3m on a 5.75% net yield, on a new five-year lease to a national food manufacturer and distributor, with strong depreciation benefits attaching to the improvements.

The client has income they do not have to manage. That was the brief.