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Niche Options

Investors interested in a property that’s a bit different but provides good returns should check out one of the niche sectors on offer in the commercial sphere, writes Miriam Bell.

By: Miriam Bell

1 March 2019

Choices: it’s one of the key buzzwords of contemporary life. Having options and the ability to choose from those options is something that most people aspire to. And, in this day and age, the possibilities for doing so are greater than ever.

This holds true when it comes to choosing a commercial property to invest in. In fact, one of the exciting aspects of commercial investing is the sheer scope and variety of different properties available. Even within the broad sector types (retail, office and industrial) there are sub-sectors (for example, food and beverage outlets in retail) and few properties are exactly the same.

But wait - the diversity of property options is broader still. Alongside the three main sectors, there is an array of smaller, niche sectors in commercial. These include motels, childcare centres, and carparks. In this article we round off our sector spotlight series by taking a quick look at a few of these niche sectors.

Tapping Into Tourism

Airbnb might dominate the headlines when it comes to short-stay rental accommodation these days. But hotels and motels pre-date Airbnb and they have long been an attractive option for investors. These days New Zealand’s booming tourism industry is struggling with a shortage of accommodation and that makes for solid opportunities for investors.

While large-scale hotels are out of reach for many investors, motels are a cost-effective proposition for investors who would like to tap into the returns being generated by the tourism boom. In a recent hotel industry commentary, Bayleys Director Hotel and Tourism Nick Thompson says that with demand for accommodation unlikely to drop-off, motel businesses offer owners a longterm, secure income stream.

“For long-term investors, there is also the option to land bank or redevelop. Motels often occupy substantial tracts of land in high-profile locations, and those in metropolitan areas, where demand for space is high, can be turned into higher value property as gentrification occurs.”

Some of the other advantages of motels are that tenants tend to be stable, leases are long, yields can be high if the motel is located well, there are minimal outgoing costs and most maintenance (barring structural issues) is the responsibility of the lessees.

Thompson says while demand for tourist accommodation is outpacing supply, the sector does have challenges. “Competition can be high for metropolitan motel properties, while many properties require more investment capital to bring them up to the standard expected by an increasingly discerning tourism market.”

‘Motels are stable investments and they tend to offer good, strong, passive cash flow which is something many investors are looking for’ ANDREW BRUCE

It is also critical for investors to do in-depth research into the area they are considering a motel property in. They need to think about the level of tourist traffic and they should aim for a property that is close to something like an airport, transport hub, main arterial, convention centre or tourist attraction.

Auckland Property Investors’ Association president Andrew Bruce has a motel in his portfolio. He built one on a block of vacant land he owned in Hamilton. While he was a novice in the market beforehand, he learnt a lot over the development, he says.

“There are some key factors you need to think about because they impact on returns and value. One is location – where the motel is, what it is near, and the pros and cons of it. Our motel is on a main road. That might be a bit noisy but people will pass by and see it. As opposed to having a place in a quiet cul de sac which people don’t see or go into.

“The other is your target market, whether there is demand and how the motel is configured for that market. Given our proximity to the hospital, we had a definite target market – people wanting to be near the hospital. That means we needed to set it up differently than if we wanted to appeal to a corporate market. For example, we have put all our onebedroom units on the ground floor with easy access.”

For Bruce, the potential for long-term leases, which place responsibility for most maintenance on the operator, is one of the big attractions of motels. On the downside, there is not the same level of capital gain you see in other types of property and if you buy an existing motel it can be hard to add value, he says.

“Overall, motels are stable investments and they tend to offer good, strong, passive cash flow which is something many investors are looking for.”

Child's Play

It’s well-known that New Zealand’s strong population growth over recent years has put pressure on housing supply. Less discussed is the impact it has had on the early childcare sector: not surprisingly there is high demand but tight supply.

More facilities for childcare are desperately needed and the industry itself is a growth one which is supported by government funding. While many new early childhood centres are being built, particularly in Auckland’s expanding outer suburbs, many childcare operators choose to lease rather than own these new developments.

This all means leased childcare centre properties have become one of the darlings of commercial property. Much like motels, they are a relatively affordable option for smaller investors who are looking for a long-term passive investment with strong fundamentals.

Childcare centres have some enticing features for investors. One big attraction is that they tend to have longer leases than other types of commercial property. Ten years, often with further rights of renewal, is a typical lease term. Additionally, tenants are stable as childcare centres usually operate under the same owners for long periods.

Further, childcare centres tend to be higher yielding than residential investments and require a lot less management, with the tenant responsible for managing and paying all the outgoings. Due to the strength of the leases involved, along with New Zealand’s high childcare participation rate, they are considered relatively low risk. To top it off, childcare centres can easily be converted back into residential properties.

But while they may be low risk, childcare centres are not entirely without risk. Demand for them is high and supply is tight so that has pushed prices up and yields down.

Another issue is the increasingly competitive marketplace. It has attracted some big institutional childcare providers who are buying up smaller businesses to increase their market share. Their financial resources could make it much harder for smaller investors to compete.

Prominent investor David Whitburn recently diversified his commercial portfolio to include a childcare centre in Kelston, which he developed himself. He’s a big fan of the sector and excited about his property, which is leased until 2031 with two rights of renewal after that.

Investors do need to be cautious when it comes to the area a childcare centre is in, he says. “Some areas actually have an oversupply of them – even in Auckland. It can cause grief in terms of returns if there is an oversupply in an area where your property is.

“Yet many other areas have an undersupply of childcare centres. So you need to do careful due diligence and identify an area which has an undersupply of them. I would invest in another one – but only if my research showed me it was a good area for it because the location is critical.”

Park Or Store Investments

On the more unconventional side of the commercial property ledger, there are two niche sectors which – although quirky – have been gaining attention as alternative investment options of late.

The first of these is car parks. Once this would have been a laughable concept in New Zealand but, as the main urban centres get bigger and more intensified, car park supply is getting tighter. Not only are there more people living and working in the cities, but apartments and offices are being built with less carparks in a bid to reduce traffic. That means there are fewer carparks available.

As is usually the case, this has led to a major increase in the value of, and prices attached to, car parks. And that’s where the headlines come in: In late 2017, a single Auckland CBD car park sold for the jawdropping price of $265,000. While this was a record, many Auckland CBD car parks are worth up to the $100,000 mark.

But it’s not just the increasing value of car parks that make them a tempting investment option. The returns may not be spectacular, but they are the ultimate “hands off” investment. They are simple and reliable, they have no fixtures or fittings to worry about and they require very little maintenance.

There are some costs associated with car parks. Even if the car park is not attached to an apartment or office, there are still body corporate costs and rates to pay. Also, car park owners do need to pay their share of building expenses, like watertight repairs, when required.

For some investors though, they are well worth it. Vaughan Heslop is a commercial real estate agent and an investor. He owns carparks in the Hamilton CBD and says they have been great performers. Although he bought his first carpark as a novelty, he believes there is good market demand for them and that they will go up in value.

The second quirky niche sector is storage units. They might not be the most glamorous of properties, but such is their growing appeal that we published an article dedicated to them in NZ Property Investor last year. Much like carparks, they are attractive because they provide steady cash flow, less capital outlay and maintenance upkeep and easier property management.

Bayleys Rotorua commercial agent Mark Slade says they also have good scope for growth. That’s due to the upswing in higher density housing options which usually have less storage space. “People living in townhouses and apartments need extra storage options so demand for units will increase as that type of housing increases.”

‘When it comes to childcare centres, you need to do careful due diligence and identify an area which has an undersupply of them’ DAVID WHITBURN

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