Investment in any form of property is evaluated from the viewpoint of capital appreciation or income appreciation. In income-yielding properties, rent received determines how much the property would be worth in terms of an investment.
In short, income appreciation improves an investment medium and thus also leads to capital value appreciation, vice versa.
The Importance of Occupancy Rates
Occupancy ratio is the ratio between the amount of net rentable area rented out against the total not rentable area in a particular building, at a point in time.
Method of measurement could defer according to the type of building.
For example, a multi-storey residential development has a total of 100 units and only 50 units are rented out. Occupancy Ratio = (50/100) x 100 = 50% occupancy
In other types of buildings, square footage is used as unit of comparison. For example, office or commercial buildings. In hospitals and cinemas, the unit of comparison would be per bed or seat basis.
Occupation shortfall or "void" refers to shortfall between total lettable area and area let out.
Void periods determine the amount of income receivable or generated by a property.
Legal Implications of Voids
Since voids in property has an effect on rental value and that the property tax by assessment rating is determined by the annual value which has its basis on rent, the provisions of Local Government Act 1976 (Act 171) comes into force.
S162: If a building is unoccupied and no rent is payable or received from more than 1 month period in any half year of rating period, a refund / remission on a pro-rata basis proportionate to the period during which its unoccupied will be given. This means that if any void period within a building exceeds 1 month, it can be used to claim a rebate on the assessment! It is however subject to the following conditions:-
1. The building is in a state of good repair and fit for occupation.
2. Every reasonable effort has been made to obtain a benefit.
3. Rent demanded by the landlord is reasonable.
4. Building has been vacant during the whole period for which the rebate is claimed.
Sustaining Occupancy Ratios
Occupancy ratios are important benchmarks in assessing property investments especially income-generating properties. Property owners should maintain occupancy ratio at a high level. Inversely, it means keeping the voids low.
Some buildings can be described as having high or low tenant turnover rates, which is the amount of space vacated yearly in relation to total net rentable area. The effective turnover rate (a more precise measure of tenant loss) is the ratio between the actual space being vacated and the potential space during the year.
Buildings with tenants having differing tenancy periods will experience a particular tenant turnover rate every year. The owner and/or his
agent has to be continuously revising and seeking tenancies to establish high occupancy rate. It is therefore advised that tenancies up to 3 years are secured in the first instance with option to renew for a period of 2 years. This gives owners sufficient time to prepare the restructuring of tenancies in a building.
During economic expansion, tenancies tend to rise. It is imperative in this period to secure as many tenancies as possible. It is also important to identify areas within building which can secure rentals, even for a short period!
For example, using large foyer space for art and craft exhibitions; shopping malls having seasonal tenants to set up shops for short periods during run-up to festivals; ancillary facilities in some buildings i.e. meeting hall can be used to host modest campaigns to attract users hence contributes to eventual rent roll of building.
Continuous effort in market research on tenants is the best and most effective method in planning for vacancy periods. For example, conducting market surveys of tenants in offices, shopping centres and residential buildings.
Agents with information on tenancy periods and rentals can approach tenants in buildings which are nearing the end of tenancy periods and introduce tenants to alternative buildings which are anticipating vacancies. This way,
agents will then be able to set up tenants register containing all information collected from market research and tally information against data on existing tenants in the buildings he/she is currently managing to plan forward and strategise.
Another method of avoiding vacancy problems after short periods of time would be to secure long-leases more than 3 years. Such arrangement for longer leases is normally palatable to large corporations and banking institutions who do not want to be too mobile.
During low economic expansion periods, occupancy rates will diminish. To attract tenants, owners could seek to provide various facilities and services. Although it might not help to optimise rental, it helps to at least sustain occupancy rates.
Identifying Quality Tenants
Good tenants are not always identifiable. Market research approach is stressed.
Agents who are continuously documenting findings will be able to chart and identify quality tenants.
Background research via company searches assists to categorise tenants within register into different levels based on paid up capital, staff strength, punctuality on rental payments etc.
Public relations on part of landlord through
agent in highlighting various characteristics which might appeal to quality tenants should be done on individual basis.
Once a quality tenant is identified, a personal approach in capturing tenant's interest in the building is inevitable.
Conclusion
What is required today is a positive property management approach which allows
agents to prepare to face the future via forward-planning.
A competent
agent should obtain as much information on occupancy rates of as many commercial and residential buildings. He/she should then identify certain buildings which he/she will be able to obtain tenants and improve the occupancy rate nearer to 100%.
Whether you are buying, selling, or just plain interested in real estate, connect with Penang Property Angel today for professional assistance.
