Frequently Asked Questions
What is Gross Lease?
A lease where the tenant pays a single monthly rental, inclusive of all costs. With this type of contracts, the landlord bear risk of increased operating expenses.
What is Net Lease?
A lease with a provision for the tenant to pay, in additional to rent, certain costs associated with the operation of the property.
What is generally included in operating costs?
Operating Costs are all the costs incurred by the landlord in maintaining and running the building. These costs generally include the following:
- External cleaning including windows
- Cleaning of common areas
- External maintenance of building
- Maintenance of the garden areas
- Insurance of the building against usual risks
- Maintenance of lifts
- Meter Reading Charges
- Property Management and administration fees
- Provision of consumables to the toilets
How are escalations determined?
There is a widespread misconception that the escalation rate charged by landlords is some form of inflation protection. It is not. It is a contractual mechanism to ensure rental growth. The fundamental reason behind this mechanism is to provide comfort to the investor that he or she will obtain an adequate investment return. An investor into real estate is investing for a total return and that total return must be attractive enough to justify the additional risk which is perceived to accompany the investment.
What are the considerations in the purchase vs lease debate?
- Personal control over the property
- Security of Capital
- Positive/Negative operating yields
- Leverage for further lending
- Cash Flow liquidity for gearing
- Management Burden
- Legal complexity
- Inflation, deflation and real estate cycles
What is Rental Concession (Tenant Incentive?)
Concessions a landlord may offer to a tenant in order to secure tenancy.
What is Capital Gain?
Increase in capital value of a property on which tax is payable, either when sold or deemed by tax rule to be incurred.
What is Capitalisation (Cap) Rate?
A ratio of the relationship between a year’s cash flow and the present value of the cash flow. The rate at which the net income of a building is capitalized into perpetuity to derive its market value. Cap Rates are the property equivalent of the forward earning yield of listed shares.
What is Depreciation?
As properties age, they lose value because of “wear and tear” and “Obsolescence”. The Building’s value depreciates as a result.
What is Developments Rights?
The legal ability to develop a piece of land, usually as confirmed by a town planning scheme.
What is Floor area Ratio (FAR)?
The ratio of the total area of the floor of a building to the total area of the land upon which it stands. Between one municipality and another, differences can exist in working out the ratio. Decentralised nodes tend have low bulk: city centres have high bulk.
What is Freehold Title?
Unlike sectional title, freehold title means that the property owner holds tenure over the entire property and not just a portion of it.
What is Gearing?
Also referred as leverage. A property owner’s debt as a percentage of the value of the property. Also called loan to value.
What is Gross Lettable Area (GLA?)
Total area that can be rented out to tenant. It usually includes common area such as kitchen and bathrooms, but excludes parking and fire escape.
What is Initial Yield?
The net rental income from the first year of a property investment divided by the value of the property expressed as a percentage; also an indicator or risk.