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Is Commercial The Answer?

Investors dreaming of financial freedom should look to commercial property, argues Jeff Brill, the author of the first book on commerical property investment in New Zealand since the GFC.

By: Jeff Brill

1 October 2018

The population of New Zealand is, according to Statistics NZ, growing to the tune of one extra person every five minutes and 55 seconds. This is calculated considering one birth every eight minutes, one death every 14 minutes and one immigrant being granted NZ Residency every eight minutes.

Property prices are climbing out of reach, the Government is reducing incentives for local private investment to help supply, a new Overseas Investment Act is arriving soon, teachers and nurses are striking for more pay and it is more common to see both partners in the work force to help make ends meet.

With little time to look after those that need us, child care and retirement villages are flourishing around the country and one can’t help but look to the future to see where we are all headed.

With home ownership rates the lowest in 66 years (Statistics NZ) it looks like we are heading towards a “rental economy”. This makes one wonder where all the superannuation is going to come from in the ever-certain scenario where we can’t look after ourselves when we hit 65 plus?

Commercial Answer

Many of us have equity in our homes with an LVR below 80% if you purchased pre-2017. Buying another residential property may not be wise in the current market unless you can add growth by doing the property up, subdividing, utilising a zoning change or changing its use.

However, a commercial property can be purchased cheaper (than residential), with a higher yield and with more definite value-added opportunities if carried out properly. With yields in the range of around 5-7% in the main centres around Auckland and up to 10%+ in other areas, you will gain a positive cash-flow with a commercial investment.

This cash flow can be used to reduce your home mortgage so the net result is that you will have grown your asset portfolio and your mortgage will be paid off faster than it would have if you did nothing. If the interest rates rise, this positive cashflow would act as a hedge for that risk, so you are covered here as well.

When you look at the above scenario, you may be asking yourself why you are not doing this, however, wait, you need to be careful, there are no free lunches out there. Every upside comes with its own measure of risk and this is no different. There are certain rules you must follow to reduce this risk.

  • You need to find a town that has a growing population, growing business area, positive plans from local council.
  • Various industries (not a one-horse town) in place.
  • You need to look for the big retail outlets that feed on growing populations, use the benefit of their research and trust that they know what they are doing by locating in this township.

Once you have the right location, the next step is to see what is available in your price range and then to gather information so you can analyse the leases. These are some of the factors that need to be undertaken, in addition to making sure that you can add value before you make a purchase.

When you make a purchase and start your commercial portfolio, if you’ve done it properly you can keep going by adding more properties and more cashflow.

Golden Rules

This is possible because commercial property is no longer an exclusive domain for the rich. These days many mum and dad investors are learning to play and are making substantial gains to secure their future.

In my new book, The Sophisticated Property Investor, I outline the ins and outs of investing in commercial property. I also detail the tools and information needed to invest in the sector wisely, be it a building of your own or a share in one.

‘As a golden rule, you should never buy a property unless you can add value to the purchase price, either immediately or further down the track’

But remember – while looking around for a property to start or grow your commercial property portfolio, as a golden rule, you should never buy a property unless you can add value to the purchase price, either immediately or further down the track.

Also, a warning to newbies, if funds are short you only need to make one mistake which may result in your funds being locked up, then leverage or even payback of your initial investment could become a huge challenge. Liquidity changes with the market cycles and one has to keep in mind the “what if” scenarios in case you are in the position of needing to sell quickly.

Here’s an excerpt from the book where I discuss what potential investors need to know, and consider, before they make a move into commercial property.

Getting Started

Before you get into any game, it is advisable to know the basics on how to play. Commercial property is different from residential in that the value is determined primarily on the strength of the occupants (tenants) and how long they are willing to stay.

Variables such as location, tenant demand, zoning, purchase price, structural integrity, local and world-wide trends all become part of the learning and planning process before you get into the game. The aim of the game is to add value and you must always see how you will be able to do this before you commit to purchasing a commercial property.

Depending on the property’s use, you may increase its value by adding more office, warehouse, store frontage, parking, storage, conference facilities, or anything related to increasing the floor area to increase the rent. The other important element is the incremental income that you can increase the rent by at the time of rent review.

This may already have been determined depending on what is written in the lease. If the rent review is set to market rent, this can be subjective and arguable given that “market rent” falls within a range of values as opposed to a specific one.

Rental valuation is a long way from being considered an accurate science and the subjectivity range can be as wide as there are personalities in the valuation field. When you have provided a rental valuation of a certain figure and the tenant has provided another valuation at a lower figure, then you may have to contract a mediator and/or obtain a third valuation from a valuer that both you and the tenant are happy using.

It is a good idea to have a professional look at the rent level prior to purchasing a commercial property so you know where in the market rental range the investment is situated. If the rent is at the top of the rental range the opportunity to achieve a rent increase come rent review date may be sparse.

Along with rent reviews, there are other tools that you need to become familiar with before you make a start. Whether you have entered the game already or you are still at the thumb sucking stage, one thing you need to have is a positive state of mind and an intent to have the choice to retire after 10 years from commencement.


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