Misconceptions preventing people from investing in industrial real estate

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It was a string of coincidences that turned Lillie Cawthorn onto what she believes is the “hidden jewel” of real estate investing.

Almost two decades ago, Cawthorn, who was an experienced residential investor, decided to visit Australia on holiday, not knowing it would set her on the path to investing in industrial real estate.

“I was a residential property investor. I’d never had any interest in industrial property,” Cawthorn said.

“I came to Australia for a holiday and met my husband, who happened to be an industrial real estate salesman. If that hadn’t happened I never would’ve come across industrial real estate,” she said.

Cawthorn is now a director of an industrial property trust and and a shareholder in an industrial real estate agency, both based in Sydney, and believes it’s people’s incorrect perceptions of the sector that turn them off it.

“It’s still pretty well unknown. In my opinion it’s really the hidden jewel that only people who a really in the know seem to look at,” she said.

“One of the problems is that it’s always lumped with commercial real estate. A lot of people think it’s all under the one umbrella, but there’s a lot of difference between shops and factories.”

When talking about industrial real estate, Cawthorn is focussing on building such as factories and warehouses, property types which often conjure up daunting images for many.

“When I started visiting factories I was picturing huge red buildings with chimneys billowing smoke and men in hard hats, all those sorts of things.

“There are of people who are real gung-ho and real intense about it and do invest in those huge buildings, but you can get great results with a small strata title factory that has one or two rooms and might be used by somebody whose business is just one person.”

Cawthorn believes women in particular are somewhat scared of the industrial sector, believing it’s a “man’s world” and has recently written a book, The Money Factory, aimed at encouraging women to consider industrial investing.

“I think a lot of women are a bit nervous about it. They seem to think of it as man’s world and I wanted the book to show them that’s not the case.

“It might not be something they can relate to, but with a bit of guidance and the right mentor there’s no reason they can’t start investing and really benefit from it.

“In a lot of ways it’s like investing in anything, if you follow good guidelines, find people to give you correct advice and get good asset managers then you should be ok.”

For those who do decide to head down the industrial path, Cawthorn believes they will see some benefits that don’t come with other types of real estate.

“One of the pros is that the leases tend to be longer. Also if your solicitor knows what they’re doing then the leas will include a make good cause.

“That means when the tenant leaves they are legally required to remove any fittings they’ve installed, repaint or recarpet if it needed and make sure it’s in the same condition as when they entered it.

“Returns are much better than residential real estate. Residential returns in somewhere like Sydney have been abysmal recently, you’re looking at 2% - 5%, for industrial real estate they’re more around 7% - 9%.”

Cawthorn also said a small factory is likely to be a cheaper way into the market in a location like Sydney then compared to residential properties, however she did acknowledge there are some challenges.

“The GFC was hard on a lot of small businesses and since. For me I was lucky enough to keep all of my tenants.

“Since then rents haven’t really gone up. But with industrial real estate it’s a bit like a marriage where you need a bit of give and take. If somebody’s business is struggling, you can’t really charge them more rent.”

While seeking advice before making any investment decision may be a prudent decision, Cawthorn said it can be especially important when starting out in industrial real estate.

“One thing I would recommend for people starting out is to be careful of what they buy, especially purpose built factories. I wouldn’t recommend anybody buy a purpose built factory, they should be looking at more generic buildings.”

“If you’ve got a purpose built building and something happens where the tenant gives up the business and moves on, then you’re really limited in terms of being able to find a new tenant.”

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