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Cash Flow King

Prominent residential investor avid Whtiburn is upping his focus on his commercial property portfolio. He tells Miriam Bell why it seems the way to go. Photography: Stephanie Creagh

By: Miriam Bell

30 June 2018

It’s no secret that the times are a-changing for the residential property market. Alongside the cooling market and tighter lending conditions, new government housing and tax policies mean that investing in residential property no longer has the attraction it once did.

But commercial property is a different beast. While many investors are leaving the property market altogether, others are simply changing their focus and looking to commercial investments. One prime example of this is high-profile Auckland investor and developer, David Whitburn.

As a board member and immediate past president of the Auckland Property Investors’ Association (APIA), Whitburn has long been one of the public faces of residential property investment. He remains as passionate about residential property as ever, but the changing times have led him to start ramping up his commercial property interests.

Thinking Long-Term

Whitburn has a law degree from the University of Auckland and worked at Deloitte and Russell McVeagh after leaving university, but property has always been his calling. Initially, his interest was prompted by his grandmother who he was very close to, and how her rest home fees were paid.

“My grandfather was a builder and built a home with an income stream attached in Kohimarama in the 1950s. Wind the clock forward a few decades and, after his death, the passive cash flow from that property gave Gran her rest home fees and spending money. After she paid for half my first car, I used to drive her round. I got to meet the tenants, go to hardware stores and deal with the tradies with her when I was still at school.”

While it was a bit of an adventure at the time, his Gran actually taught him to think long-term, he says. “She always told me to save and prosper and to take the sacrifice now for the long-term future. She also taught me the simple things like cash flow, equity and growth and to ensure you look after yourself as you don’t want to trust a government or anyone else to look after you.”

Those lessons stuck with him and, after realising early on in his professional life that he didn’t particularly like working for other people, he started to think about property as the best means to an end.

He bought his first property in 2002. It was a three-bedroom house on an 800m2 section in south Auckland and cost $140,000. Later that year, he bought a second property and then he bought another in 2003. After spending $11,000 renovating his third property, it went up in value by $30,000 and his future was set.

‘Ensuring strong cash flow immunises my portfolio. But keeping up the yields in residential property isn’t easy. Commercial property is a far better bet’

To the consternation of his parents, Whitburn decided to give up his job and become a full-time property investor. While the early years were hard, he persevered and has worked successfully in property ever since. Alongside his own projects, he works with partners on property investment and development projects and also acts as a consultant and adviser. These days, his personal portfolio is made up of “over 10” properties in West and South Auckland.

Portfolio Diversification

For many residential investors who move into commercial, the switch is a calculated one. But for Whitburn, the move into commercial was more organic. He’s always been keen on the diversification of interests to minimise risk, so when the opportunity to buy his first commercial property came up in 2010 it seemed like a good idea.

Similar thoughts were behind his second commercial investment, which was a joint venture with some friends, in 2012. But, in the years since, the residential property market has altered significantly and that prompted Whitburn to think hard about the direction of his portfolio.

Property investment is based around three pillars – cash flow, equity, and growth, he says. “I have always wanted to create passive cash flow to a very high level. The goal is to try and make sure you have more money in your back pocket at the end of the month than the beginning.

“Ensuring strong cash flow immunises my portfolio and means that if something was to happen – like a major vacancy, an economic downturn or a natural disaster – my family and I wouldn’t face financial challenges. But keeping up the yields in residential property isn’t easy these days. Commercial property is a far better bet.”

The promise of better yields from commercial property, along with the desire to diversify his portfolio further given the changing environment, led Whitburn to build up his commercial property interests.

In doing so, he has moved into a less traditional commercial sector: early childhood education (ECE) centres. A couple of years ago, he bought a large section in Kelston after identifying the area as one with an undersupply of ECE centres.

“It was always my intention to build an ECE centre on it. But the section I bought was too big so I cut the back bit off and developed three town houses on it. The townhouses are being sold and the proceeds from their sale will then be reinvested back into the centre development.”

Whitburn then recruited an experienced ECE operator as his future tenant and has worked with them on the development and design of the centre, which is licensed for 76 children. The centre is now going through its final inspections and is set to open its doors in the near future.

David's Commercial Portfolio

  1. A cheap and cheerful 142m2 office building in Massey, near Westgate. David bought it for $450,000 in 2010. It is now worth $800,000 and has a net yield of 8.5%.
  2. An 350m2 industrial property in New Lynn. David bought it via a joint venture syndicate with two friends in 2012. It cost $1.2 million. He has had two tenants in this property, but the current long-term tenant is a mechanic. He put in a mezzanine floor for about $80,000 a couple of years ago. That addition brings in an extra $15,000 in rent per annum. This means the net yield for the property is now 8.7% on purchase price plus renovation costs.
  3. A nearly completed child care centre in Kelston. David bought the 2700m2 block of land a couple of years ago. He always intended to develop a child care centre on it. But the site was too big so he cut off a section and built three town houses on the back bit. He is selling the town houses and will reinvest the proceeds in the centre’s development costs. The new centre is 461m2 and is licensed for 76 children. The total project cost is $4.38 million, but $2.15 million relates to the townhouses which are being sold. The net proceeds (after paying GST) will be $2.23 million which will generate 7.2% net yield.

Before going down the ECE centre track, he did a lot of research and recommends that any investor interested in the area should do the same. That’s because while ECE is a growth area and tenants like to sign up for very long-term leases, selecting the right location is critical, he says.

“You need to be cautious as some suburbs have an oversupply of ECE centres. In contrast, some areas are undersupplied. Many people think they are a licence to print money but they aren’t necessarily. There can be pain in terms of returns if there is an oversupply and the centre you invest in fails.”

Making Strong Choices

In Whitburn’s opinion, making the move into commercial is the way to go these days. The winds have changed and for investors with a bit of equity, who are wanting to bolster their portfolio, commercial property is a strong choice, he says.

“While you will pay more when buying, commercial property provides higher yields and cash flow. But there are different factors to take into account. In commercial, zoning is important and, critically, so too is location. To ensure a good investment you must get the location right. That can mean a range of things: motorway access, amenities, proximity of other businesses, and so on.”

The risk of vacancy is one of the biggest challenges in commercial properties. Whitburn has not had to deal with a lengthy commercial vacancy, but he has heard some horror stories from those that have. What it means is there is a lot more to think about when it comes to leases and tenants, he says.

“It is essential to find out all about your tenant’s business, the market surrounding it and their income from it. You need to do comprehensive due diligence and aim to get as high a quality tenant as possible. In line with this, you also want to do your best to avoid problems with a tenant because you don’t want a vacancy.

“Communicate with tenants regularly from the word go, be proactive and talk to them, and assess and respond to their needs. For example, after chatting to the tenant in my industrial property, I learned they needed additional space. So I added a mezzanine floor into the property. If I hadn’t I would have had a vacancy that could have lasted for months. Instead I got a grateful and happy tenant.”

‘Avoid problems with a tenant because you don’t want a vacancy. Communicate regularly from the word go, and respond to their needs’

Besides the dependency on tenants, he lists natural hazards – particularly earthquakes, location change risks, government regulatory risks like the introduction of a land tax, and personal situation risks as the big challenges in commercial property.

Keeping up with the market in terms of building appearance and maintenance is also important to mitigate risks. Whitburn advises that investors ensure they have decent provision for repairs and maintenance.

“Time will strike you and you will need to lay out some major expenditure for something like earthquake strengthening, re-roofing, or fixing building leaks. It also pays to get a good facilities management contractor to assist with your property management and maintenance.”

Going Forward

Looking ahead, Whitburn believes the commercial outlook is good for most areas of the country although the markets do vary across property types and the cities or towns they are in. “In general terms, things look positive with no sizeable vacancy rates in the major centres, and improving conditions with demand mildly outstripping supply.”

He points to industrial property as well worth considering. That’s because warehouse spaces need to increase to meet the trends of online shopping as retailers shift their focus to stock management and centralised delivery and logistics systems to fulfil orders.

“Personally, I am planning to purchase another commercial property. I’ll be using the develop-to-hold strategy to get the developer’s margin for taking some risk. I’ll also ensure that I have an extremely high NBS rating and that I work with tenants in advance to deliver exactly what they want to get a long term lease income.”

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