SWOT
david hornby

SWOT is one of the most useful methods of describing and analysing an investment property. It is an all encompassing analysis of the property from the 4 perspectives. It is recommended that the valuer’s report be prepared under SWOT and it is a good foundation for the strategic plan. SWOT stands for:

S = strengths
W = weaknesses
O = opportunities
T = threats

STRENGTHS

Strengths are the positive features of the subject property. Most important are any comparative advantages the property may have other investment properties in the locality. When analyzing factors in SWOT it is useful to subdivide them into macro or external factors and micro or internal factors. Macro factors are those factors outside the control of the investor and cannot be changed. On the other hand micro factors are internal within the building that can usually be changed or altered by the investor.

Location should the starting macro factor for both strengths and weaknesses. It is can be one of the most important features of an investment property. Generally, location is measured as the distance from the centre of the CBD. The closer to the CBD the better accessibility the property has. Therefore, a strength is an investment property close to the CBD or regional centre. Other strengths related to location may be:

• Fronting a street with high pedestrian flow
• Good and/or close access to public transport

Other strengths may be:

• Well located to the major transport systems - Ports, airport and major highways and railways.
• Readily accessible by the workforce
• Comparatively cheap to buy
• Comparatively cheap to build or develop. Eg good foundations
• Low regulatory framework eg an amenable council in a country town trying to attract development. The local authority may offer a rate free period.
• Low cost energy services, reliable supply. May be subsidized by local authorities trying to attract development.
• Clean and reliable water supply. Dedicated protected catchment areas ensure high quality.
• A waste disposal system and solid waste that are well developed but with low disposal costs.
• Availability of raw materials. For example, primary products including agricultural products and minerals. Other materials raw or semi processed.
• Tariff or non tariff barriers inhibiting the importation of manufacturing inputs.

MICRO OR INTERNAL STRENGTHS

The following lists the most important strengths at micro level:

• Type of construction. Modern and efficient design.
• Year built. Generally, the more modern the better the building
• Good standard of finish. An architecturally designed building is always superior to one that is not.
• Good presentation, size and standard of foyer. This is the area that provides the public their first impression of the property.
• High ratio of retail space (if any) to the total floor area
• Attractive views and/or northerly aspect. Northerly aspect will aid energy efficiency.
• Good ratio or internal (net ) areas to outside (gross) area. A good measure of efficiency of the building design. Modern buildings should have a ratio of at least 80%.
• Good location and type of the service core. The core should be a central whole floor plant in a large office block.
• Good location of toilets. Male and female toilets should be on the same floor.
• A building with tearooms and cleaners' facilities
• The fire escapes should meet current standards. Better if there is direct access to the street rather than through the foyer. No fire orders over the building. Large sized and high load bearing “load areas”. Eg for compactus

• Floors have a high fire rating. For a large building the investor should have an expert report carried out on these factors.
• The building has separate air handling units on each floor and a zoned system
• The type of plant, including the number of cooling towers, chillers and boilers are in good order and sufficient for the size of building.
• The building has column free office space. This allows the owner/tenants greater flexibility in subdivision design and a greater area to lease.
• The building has a good amount of natural lighting. Therefore, valuer should determine how much natural light is available per floor.
• The building meets current Occupational Health and Safety (OH&S) requirements. This is particularly important for leasing to government departments.
• Any extra services such as a cafeteria, shop or child care
• Sufficient carparking within the building

• Good height of ceiling. The height of the ceiling is important for warehouses where the cubic capacity of the warehouse is the best single measure of the storage capacity.
• Good ingress and egress to the building. If the factory/warehouse is particularly busy and large, the driveway should have sufficient room for temporary parking (a magazine road) and turning.
• Good and efficient facilities for loading and unloading. This means a loading ramp that is at the right height and size for loading and unloading containers on a semi trailer. Almost all the measurements of access is according to the size of containers. For example, the factory/warehouse doors should be wide enough to accommodate a container on a semi trailer.
• Flexible zoning that will allow a change of use in the future if required. Also a local authority that is amenable to development and changes of land use.
• A good sized block allowing ample room for expansion

Another strength may arise by the quality of neighboring tenants and neighbors. For example, if the building is located in the same area as large well known companies then that would lend a certain prestige and improve the image of the building. This also applies to tenants in the building. The building may have a large multinational tenant with naming rights to the building. In this case higher rental should be obtainable in that because of the prestige and image of the major tenant.

WEAKNESSES

Because you are preparing a report for the investor (your client) it is necessary to advise them of weaknesses as well as strengths. That is, nothing is really achieved by avoiding the problems that the property may have. The listing of weaknesses will also help put the investment plan in perspective so that the owner is not overly confident about the rental level that they will receive for the property. In other words a FULL investment report will help to establish the market value and expected market rents for the property.

We will not list all the weaknesses that the property may have because they are mostly the opposite to the list of strengths shown above. For example:

• A major overhaul of the building will be required in the immediate future? A common problem with 1970/80 air conditioning systems is poor sensing devices so that although zonal, the system does not respond to client needs.
• The car parking may be off site or managed in conjunction with other contiguous commercial users. This is a much inferior arrangement compared to on site parking directly managed by the owner.

OPPORTUNITIES
Opportunities is the third heading in the SWOT analysis. It is that part of the investment concerned with the functionality or utility of the investment property.
MACRO FACTORS include:

• Development controls such as town planning controls. For example, the Floor Space ratio (FSR).
• PUBLIC LAW. Law that applies generally, to the land or site. For example, property taxes, capital gains tax and betterment tax. Allowable land uses in leasehold title.
• INCOME TAX LAWS: For example, negative gearing has changed the property market for investment properties on the lower North Shore of Sydney. This important investment advantage should be marketed by the marketer.
• GDP: General strength of the economy. A general growth in GDP will encourage overseas investment and the local investor will have to compete against this competition. Other outside legal environments include the control of the FIRB and the use of an overseas owners register in Queensland.
• Industrial service roads and a supportive infrastructure are desirable features for such properties. . For example, truck servicing centre or 24 hour service stations that cater for “truckies”.
• Warehousing and transport costs. Insurance, road taxes, and industrial laws. All of these features are beyond the power of the owner to change.

MICRO FACTORS are those factors affecting rental value that are generated and apply to the premises only. For example:

• DEVELOPMENT POTENTIAL. For example, the larger the industrial building, the higher is the utility factor. That is, utility is largely related to the size of the building or the potential building. For example, the doors of the warehouse should be wide enough to allow a semi trailer with container access. Is there sufficient room to unload a container inside the balding?
• The image of the building or site is not as important as its functionality. The man question is whether or not the building is “well built”, “strong” and well designed for investment purposes. Some buildings may be dedicated or purpose built. For example, a specialist factory to make one type of drug only. Therefore, most industrial warehouse buildings are built from cheap building materials such as concrete block and/or galvanized steel and thus, easily demolished.
• Can the building be used for an alternative use? A large open plan building has more flexibility for internal subdivision and partitioning than a building with a number of rooms. The greater the opportunity of changing the land use, the safer the investment.
• A large site is more useful as it allows expansion of storage, parking with room to manoeuvre, easier ingress and egress, better exposure for advertising and promotion and expansion of the building.

THREATS
The last factor in the SWOT situation analysis is threats. As pointed out before there is no reason why your report cannot include the same factors under weaknesses as well as under threats.
MACRO FACTORS are those threats beyond the control of the investor. For example; government policy. The Government may interfere with the free market process by introducing controlling legislation. An example is commercial lease legislation aimed at protecting small commercial tenants.
THREATS FROM COMPETITION
This threat arises from new comparable investment buildings in the area. The analysis should research the local authority’s Development Applications (DAs) to determine those developments that have not yet started. This will be a good indicator of future competition to the subject investment building.
Such threats have to be tempered with the ability to let up quickly which has a momentum of its own. That is, it is easier to increase and obtain market rents in a building that is completed or partly completed.
Other external changing circumstances:

• Changes to public transport routes and timetables. For example, access, the timetables routes of the express route in the city are most important.
• The closure and opening of shopping centres
• The movement of clients and suppliers. If your tenants’ most important client(s) move to a new area it may pay them to move there as well. For example, the closeness of barristers’ chambers to the law courts.
• Changing demographic factors. For example, the cut backs of the public service
• General economic measurements. For example, GDP, SGP and RGP. See learning outcomes 1 and 2.
• Change to building rules. For example, public safety, health and fire prevention and control.

MICRO THREATS:

• Building life and design. If the building is an old building then it will have a short economic life. This will mitigate against expensive capital expenditures.
• Tenants’ demand for newer and better services. This will affect the market rents available from an older building. For example, the building may just be “old fashioned” in design and layout. These micro threats can be classified according to whether or not they come under:
• Physical depreciation
• Functional obsolescence
• Economic depreciation
• Following from 2, the availability of out of date services such as lifts and air conditioning. Even poor security control disabling 24 hour access.

• In strengths it was argued that an important advantage is that incoming tenants can “rub shoulders” with prestige established tenants. In threats the reverse applies where the leaving of a prestige tenant upon completion of its lease will produce a negative effect on future rents and the quality of the tenants will reduce.
• Loss of building goodwill. For example, a famous building name such as Wentworth Chambers in Sydney if lost would result in a substantial reduction in value.
• A culture of bad lease agreements. For example, a number of low rent leases which may have been implemented to lease up quickly, make it difficult to negotiate new leases at market rates.