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Rising prices are expected to be a hallmark of the year 2022. Many goods and services are expected to become more expensive due to the increase in energy and food prices.
The Reserve Bank of Australia recently raised its inflation forecast for this year to 3.75 percent from 2.75 percent. It attributed the higher rate to the rising costs of energy and food.
According to the Australian Prudential Regulation Authority, the average Australian insurance premium rose by 8 percent in calendar 2021.
It’s also expected that the cost of living will continue to rise. This could make it advantageous for commercial landlords to pass the rising costs to their tenants.
One strategy that investors can consider is to restructure their leases to reduce their insurance costs.
In the US, double and triple net leases are typically considered as low-risk contracts.
With a double net lease, the investor typically picks up the cost of various outgoings, such as insurance and utilities.
A triple net lease, on the other hand, allocates all of the building’s maintenance and repair costs to the tenant.
The initial face rents are typically lower with a triple or double net lease. This type of contract allows the tenant to take on a greater financial risk.
The profitability of these types of contracts is typically considered secure for landlords since their contribution is non-existent.
Any increase in the cost of an outgoing, such as insurance, can be passed through to the tenant.
The arrangement doesn’t affect the landlord’s ability to claim the expenses that the tenant has paid.
One of the biggest advantages of a triple or double net lease is that it can improve a commercial property’s capital value. This is because the tenant can’t back out of paying an unexpected expense.
In Australia, several major companies have set up their own triple or double net leases in recent years. These contracts are typically contested by syndicates and high net-worth individuals.
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Although triple net leases are generally considered safer for investors, there are still some risks involved.
Occupancy has become more responsible when it comes to hiring a contractor. This has led to substandard work being performed on the building.
Some tenants, on the other hand, don’t inform the property owner about the work that they’ve done on the building. This could void the building’s insurance policies.
If an occupier goes broke, the landlord is also liable for the outgoings, which could affect the credit rating of the property.
Despite the risks involved, many people still consider the insurance industry as a safe investment. It’s facing various challenges, such as the rising cost of materials and the increasing frequency of natural disasters.