Shopping Centre Tenancy Loans Australia

Buying a strata retail lot and buying a whole centre are assessed differently. With a strata lot, the owner controls one shop and one lease, and shares the building with other owners through a body corporate. Value depends on decisions the owner cannot control, including who the other tenants are and how well the centre is maintained. With a whole centre, the owner controls the tenancy mix, the car park and the outgoings budget, but carries every vacancy and every repair. Whole centres usually involve larger loans, full financials, a detailed valuation and closer ongoing monitoring by the lender.

Valuers capitalise net income. They start with gross rent, deduct outgoings the owner cannot recover, allow for vacancies and then divide the net figure by a market yield taken from comparable sales. As a simple illustration, net income of $70,000 capitalised at 7% gives a value of $1,000,000, while the same income at 8% gives $875,000. Adjustments follow for outstanding incentives, rent above market, short lease terms and capital works. For strata shops, valuers also check the sale price per square metre against other lots in the same centre and in nearby centres.

Most shopping centre leases fall under state or territory retail leases legislation. The detail differs by state, but the laws generally require the landlord to give a disclosure statement before the lease starts, limit which outgoings can be passed to the tenant, regulate rent reviews and set out a dispute process. Some states give tenants a right to a minimum five year term, and some prevent land tax being recovered from retail tenants. Lenders expect leases to comply, because a defective lease can let a tenant leave early or dispute charges. Have a solicitor who works with retail leases review the documents.

Centre leases often include turnover rent, marketing levies and fit-out obligations. Turnover rent is a percentage of the tenant's sales above an agreed threshold, paid on top of base rent. Lenders usually exclude it or shade it heavily. Fit-out incentives matter more. A landlord who paid for the tenant's fit-out or gave six months rent free has effectively bought a higher face rent. Valuers spread that incentive across the lease term to find the effective rent, and lenders follow the valuer. Check whether any incentive is still owed to the tenant at settlement, as the buyer normally inherits it.

Kiosks and food court tenancies are the hardest to finance. The spaces are small, the fit-out is specialised and costly, and rents per square metre are high, which makes tenants vulnerable when sales fall. Centre owners often keep the right to relocate kiosks, and many sit on common property under a licence with no separate title. Where a titled food court lot exists, lenders commonly restrict the LVR to around 50% or ask for other security. Standard shops with a regular shape, good mall frontage and a wide range of possible uses are much easier to fund and to re-let.

Banks assess leased centres on interest cover, commonly wanting net income of at least 1.5 times the interest bill at an assessment rate, and they look at the borrower's wider position as well. Lease doc loans are available for standard strata shops, typically to 65% or 70% LVR with loan size limits. A business buying the shop it trades from is assessed on its financials, as explained in our guide to buying business premises. GST usually applies to commercial sales unless the going concern exemption is met, so read how GST works when buying commercial property and confirm with your accountant.

An SMSF can buy a strata shop or a small centre under a limited recourse borrowing arrangement, with lenders commonly capping commercial LVRs at 60% to 70% and requiring cash reserves in the fund. Levies and vacancies need to be affordable from fund income and contributions, so get licensed SMSF advice. On exit, remember that the buyer pool for strata retail is narrower than for freehold shops, and values move with the fortunes of the centre. Commercial facilities are often reviewed every few years, and a fall in value or the loss of a major tenant can lead the lender to ask for a debt reduction.