JUNO INVESTING ©

New leases on life: investing in commercial property

JUNO INVESTING ©
New leases on life: investing in commercial property

 

The editorial below reflects the views of the editorial contributor only and content may be out of date. This article is sourced from a previous JUNO issue. JUNO’s content comes from sources that it considers accurate, but we do not guarantee that the content is accurate. Charts are visually indicative only. JUNO does not contain financial advice as defined by the Financial Advisers Act 2008. Consult a suitably qualified financial adviser before making investment decisions.

WINTER 2017

By Brett Whalley, CBRE

So, you’re considering commercial property as an investment. Good on you. You’re one step ahead of the mass of Kiwis trying to secure their own residential investment property or ‘renter’. 

You’ll also be dipping your toes into a market which is now particularly buoyant – and all indications are that this will continue. Plus, who can dispute the satisfaction of knowing you are the proud owner of a piece of main-street real estate, when commerce and business activity drive the economic engine of the nation? 

But first, let’s define what exactly we’re talking about. There are three main classes or sectors of commercial property: offices, retail, and Industrial. 

Time is right

Now is a great time to invest in commercial property. A supportive business environment, strong population growth, and a vibrant economy strongly underpin the market. And New Zealand’s doing well compared to its peers overseas. 

When we compare returns around the world’s developed economies, the New Zealand commercial property market has offered the second-best total return performance over the last 16 years (after Hong Kong). 

The last three years have been especially strong, well ahead of pre-global financial crisis (GFC) levels. 

Offices

Offices are the sector most associated with commercial real estate. The office sector and its yields have been performing strongly. 

Offices can be located in towns and cities, or in satellite commercial hubs, such as office parks. 

Retail

The retail sector is experiencing a sustained period of activity. You might have heard that more customers are shopping online, but that’s only part of the story. 

Major retailers are increasingly seeing shop-fronts as complementing their e-commerce channels, promoting brands and enhancing customer experience. 

The arrival in New Zealand last year of global brands such as H&M and Zara shows there is confidence in the New Zealand market, and this is expected to increase significantly over the coming years. 

Industrial

Industrial property has also seen a resurgence, as manufacturing grows. 

The rise of e-commerce is also creating greater demand for warehouse space, where companies can store and dispatch their products. 

What to look for, and where

When considering the sort of commercial property to invest in, there are three words you need to know: location, tenant, and lease. 

As in the residential market, location is key for commercial properties. But the difference with commercial is that it’s all about high profile and connectivity. Factors to consider include road frontage, car parking, pedestrian and vehicle access, public transport routes, nearby amenities and surrounding sites, and other brands neighbouring
the property. 

As a rule of thumb, look to new infrastructure as a signal of where to invest. In Auckland, sites along the City Rail Link are a good place to start. Look also for opportunities along the Southwestern Motorway. 

The Waterview Connection, which opens this year, will completely transform how people get around the city, and better connect suburbs along that route. 

The right tenant is the key to a successful commercial investment. Tenants usually stay for the long term and are usually responsible for paying outgoings such as utilities, insurance, rates, and management expenses. 

The main aspects of the lease are quite simple. The key elements are the current level of rent, timing of future rent reviews and renewals, upkeep, the tenant’s responsibilities, and any ‘make-good clause’ for
when the lease ends. A good starting point is the Auckland District Law Society’s pro-forma lease agreement, which is generally accepted by most
New Zealand businesses. 

Future trends

The big commercial property story we’re seeing in greater Auckland is the rise of the suburban nodes and business parks due to favourable changes in the Unitary Plan. These have created a whole raft of mixed-use and commercial zones, to help drive growth around transport hubs. 

This is a huge thing for commercial property investors, as it will mean they have better ability to buy into the market and more choice, as new satellite urban centres from Albany to the airport take shape. 

Traditionally, commercial properties – especially main-street retail or offices – are held by long-term investors who rarely sell. This makes this latest planning-regime change an extremely exciting opportunity to move into commercial property. 

It’s not just isolated to Auckland. In Christchurch, for example, new commercial space and retail properties are being built to support the new residential subdivisions in the outlying suburbs – places like Lincoln and Halswell. 

Queenstown is positively exploding as infrastructure and amenities catch up with recent population growth. 

So, now is a good time to get into commercial property – although it’s important you get solid advice across the life-cycle of the asset. Make sure you do your due diligence with valuation and building-condition reports, and seek advice on the purchase and the all-important factors of lease creation and tenancy management, which covers rent reviews. 

Commercial vs Residential

Another basket for your eggs: Commercial property offers an alternative asset as part of a diversified investment portfolio. It will provide you with a good, steady income stream. 

Better tenant benefits: Tenants often spend their own money on the property, especially in the case of retail properties, and the right industrial tenant can be quite self-sufficient.

Good returns: Residential property investments are hard-pressed to produce a greater than 4 per cent gross income yield, especially in Auckland, but many commercial and industrial investments can produce income yields greater than 5 per cent. And, importantly, this is measured on the net rental. 

Smaller pool to play in: Prices for commercial properties are higher, and banks are taking a more conservative approach to lending, so the pool of commercial investors is a lot smaller than in the residential market. This can mean less competition for good-quality commercial properties.