Holding out may incur unexpected costs

PUBLISHED : Wednesday, 22 February, 2006, 12:00am
UPDATED : Wednesday, 22 February, 2006, 12:00am

Landlords of street-level shops who want to increase rental income are leaving shops empty for six months in the hope of attracting new tenants prepared to pay top dollars.

But is this a rational strategy to enhance investment returns?

'Thinking of different methods to enhance rental income is absolutely a rational move,' said Eddie Hui Chi-man, a professor in the department of building and real estate at Hong Kong Polytechnic University. 'However, the outcome sometimes is not what was expected, making the move irrational.

'When landlords plan to look for new, quality tenants, they are expecting rents will continue to rise. However, the market may not perform as expected,' he said.

'As a result, they may eventually fail to find a better tenant and, because their shops have been vacant for some time, they will make a loss.'

Mr Hui said landlords should take several factors into account before they made such moves, including transaction costs. These includes estate agents' fees and legal costs, which will account for 8 per cent to 10 per cent of a property's rental value. 'Don't forget that you may need to leave the shop vacant for five to six months without any rental income,' he said.