by Jason Huljich

Every landlord knows that tenants are a key driver of performance. In fact, quality, long term tenants can make the difference between strong yields and a sale price which exceeds expectations, and a poorly performing, hard to shift property. 

At Centuria, our hands-on experience investing in and managing property has shown that good tenants make for good returns and happy investors.  So over the years, we have distilled a few golden rules and strong suggestions that form the basis of our leasing and tenanting decisions.

1. Financial stability and strength is key

Our first choice of tenant is always a financially stable, large company. No surprise there. Government tenants are a good case in point; they pay their rent on time, and the risk of default is negligible.

Otherwise, AAA rated companies, like banks and big law firms, are a good option, as are large ASX listed companies. If possible, we prefer to have a bank guarantee for lease obligations and we look for tenants with growing businesses. These tenants are likely to require more space in the future and tenants with multiple offices are even more attractive, as this presents us with the opportunity of finding space for them in other buildings we own, in other locations.

For smaller suburban properties, you may not always have the choice of Government and large multinational tenants. If you are looking to lease your property to a smaller company make sure you research them thoroughly. We always seek a credit agency rating report for smaller tenants which shows their typical timing in paying invoices. Also with smaller tenants it is best practice to seek directors’ guarantees as well as a bank guarantee before agreeing to a lease.

2. Speculative fit outs and flexibility suit smaller tenants

Our experience with smaller tenants (those with space requirements of less than 500 m²) has shown that these tenants are often keen to move into fitted out space immediately, rather than undertake a full fit-out themselves. As a result, we speculatively fit out vacant tenancies within our buildings which we believe will be suitable for these smaller companies. 

This has proven to be a successful strategy.

A good example is the lease we signed recently with Pure Hacking, an internet security company. We were able to show fully fitted out space that perfectly met their requirements in our 175 Castlereagh Street property. A Heads of Agreement was signed within 4 hours of their inspection. It is highly likely that Pure Hacking would not have considered the space were it not already fitted out in a way that suited their business.

In the same way, flexibility is key when it comes to smaller tenants. We recently split a larger tenany and fitted out the suites in 175 Castlereagh Street in order to suit a number of smaller tenants, resulting in two five year leases to the Marc Edwards Agency and Speagle.

3. Good agents find good tenants

When it comes to sourcing tenants, we rely on our network of agents for help. The best agents have the best long terms relationships and make an enormous difference to finding the right tenants. Research the market carefully to see which agents are completing the most leasing deals in that particular location. 

4. Hands-on property management

Because we are hands-on, active property managers, we get to know our tenants well. Our property management team has been with us for the long term, so they have worked with many of our tenants over a number of years. The team schedules regular meetings with tenants to be sure that any issues are addressed immediately.

We understand that most tenants expect a well maintained and well-presented property, and they expect problems to be dealt with immediately. 

However, it’s important to realise that providing first class amenities, including a quality foyer and modern bathrooms doesn’t necessarily mean spending a fortune. In our experience, the two things that tenants are most concerned with are the air conditioning and lifts, so a focus on these things is a good start.

5. Horses for courses in building standards and location

The National Australian Built Environmental Ratings System (NABERS) is gaining traction in the market, and is important to larger multinational tenants. Government tenants, for example, will not consider properties rated less than 4.5 stars. Smaller tenants tend to be less concerned about ratings, but this is changing over time. And while it is true that everyone would like the building they rent to be environmentally friendly, it is also true than most tenants are not willing to pay a premium for this.

The NABERS rating of a particular property certainly has an impact on the sale price of a property. As a purchaser, it is a serious consideration, as most informed buyers know that NABERS is only going to get more important over time.

When it comes to location, the same principle applies. Some tenants will only consider properties in a very small geographical area, sometimes no more than a few city blocks, whereas for others, the decision is more about price and a very specific location is not a necessity.

Having said that, centrally located properties, like 10 Spring Street, in the financial core of the CBD are generally easier to lease than properties on the CBD fringe.

However, business dynamics and locations are constantly evolving, and this impacts on a property’s location. For example, our property at 175 Castlereagh Street, located at the southern fringe of the Sydney CBD would traditionally have been considered less attractive, yet changes in the immediate vicinity have lifted its appeal.

The new Westfield Sydney shopping centre at the southern end of the Pitt Street Mall and ANZ’s new headquarters at 161 Castlereagh Street have attracted restaurants, bars and other tenants to this location, which in turn increased our ability to find quality tenants and increaserental levels in 175 Castlereagh Street.

The bottom line?

Ultimately, despite any landlord’s best endeavours, there are no guarantees when it comes to tenants. Business conditions change, companies’ space requirements change, and the seemingly strongest corporations can falter, when unexpected events, like the global financial crises, change the playing field from one day to the next.

However, with due diligence, research and a clear understanding of tenants’ requirements, risks can be minimised and long term, mutually advantageous relationships can be formed.

And these translate into better returns from any property.