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Cities Or Provinces?

Cities Or Provinces?

Which commercial investment strategy is best and what are the future ‘powerhouse’ areas to keep in mind? Ulf Führer has the answers.

By: Ulf Führer

1 May 2021

Residential property investors have been hit with a plethora of changes, particularly the extension of the bright-line test to 10 years and the unexpected removal of mortgage interest deductibility. The prediction certainly seems to be that there will be an exiting of residential property investors, who supply over 80% of all rental properties to the market. Using the Government’s favourite terminology, this will now be “the new normal”, and all that is left is for investors to “pivot” to the next opportunity.

In my last article, I pointed out the benefits of investing in commercial property as opposed to residential.
I would now like to talk about the differences between commercial property investment in large cities versus provincial towns.

One of the significant advantages of provincial towns is the yields (which measure property value and returns for the investor). This is why anyone invests, and the yields in provincial towns are historically higher than they are in the cities. For example, city investments may be returning in the area of 3-5% versus your typical provincial town, which is around 7-15% plus, depending on the infrastructure and development currently going on around it. Commercial yields will vary, whether it’s in the provinces or the city depending on location, market conditions, lease term, the tenant’s financial strength and market timing.
Getting the right capital growth/yield mix is a balancing act, but if one gets it right, the benefits of cashflow and capital growth can be immense.

Lower Entry Point

Entry value into commercial investment is often lower in the provinces where investors are able to enter the market as low as $50,000. This is often due to lower land values and more available space (supply and demand). Cities, where land and space are at a premium mean developers and building owners
can command maximum prices, often being able to sell investments in very competitive situations with multi-offers seen on many properties. Auction or tender are frequently-used methods of sale to extract the maximum sales price which may be from national or international buyers. In many instances, mum and dad investors are priced out of this market.

Farmers looking to diversify their investments or scale back their farming business interests often opt for investment in commercial property in the provinces. Being local, often intergenerational farming families or trusts, they prefer to invest “close to home” where they have an intimate knowledge of the market, know the local business people and decision makers, can see and touch their investment and add value if and when the time is right. Many of today’s farming families are looking for the next phase of off-farm investment with commercial property being seen as a relatively secure, passive investment with minimal risk.

In the city, councils are often slow to react and find it easier to say “no” to growth than “yes”. Provincial councils are much smaller and tend to be forward facingto development and growth projects, because, at the end of the day, this all adds to the growth of the town and the councils’ coffers.

What is prevalent is the greater focus on the development of business and industrial parks outside city centres. This has been commonplace in the likes of the UK for a long time, with these parks becoming a thriving hub of business activity and a nucleus of shared ideas.

Opportunities To Watch

Areas to keep an eye on for potential investment are business/industrial parks such as:

• Waharoa – Industrial Park
• Tauranga – Tauriko Business Estate
• New Plymouth – Bell Block Industrial
• Napier – Irongate
• Palmerston North – freight hub and ring road redevelopment
• Ashburton – AshburtonBusiness Park
• Tīmaru – Washdyke Business and Industrial Park
• Oamaru – North Oamaru Business Park.

These will become our business and production powerhouses of the future and are proving to be good commercial investments for those that are in early.

Covid has been a lightbulb moment for many businesses in large metropolitan areas, particularly manufacturing and distribution businesses, where the large population base creates more headaches than it solves.

Over the last 12-months, cities have been almost held ransom due to community transmission of the Covid-19 virus. The true financial cost of this may never truly be known, but what is known is that

companies are now more receptive to employees working from home or other locations, rather than in large office blocks in the middle of the city.

The result is a slow but steady reduction in the requirement of large office floors and, as with all things, the inevitable impact of supply and demand. As the demand reduces, so do the square metre rates in these buildings and the building’s overall value as a whole.

Big City Woes

Of course there is the possibility that eventually Covid will be gone from our lives. However, this does not change the infrastructure issues that large cities had before Covid. Woes such as traffic, an increasing housing affordability issue, and the lack of rental stock are likely to worsen. Employees will not want to travel two hours each way to work because they can’t afford to live in the city in which they work.

We know 80% of all New Zealand businesses are SMEs, many of these based outside of city centres. Cities are not self-sustaining – they require the products, services and manpower from provincial New Zealand to exist and survive. The majority of the country’s GDP comes from outside the main city centres, which is unlikely to change in our lifetime.

So, isn’t it simple? To use a fishing analogy, fish where the fish are (or at least 80% of them) and whatever you do – sell high, buy low and talk to the one in the know!