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Purpose In Property

Moving into commercial property has been challenging for long-time residential investor Michael Mackinven but it has also given him a greater sense of meaning, reports Miriam Bell. Photography by Stephanie Creagh

By: Miriam Bell

31 March 2019

Sixteen years ago, Michael Mackinven was living the ex-pat dream in Japan. Based in Kochi, he taught English, lived near the beach and went surfing every day. As an English teacher, he was awarded a certain elevated status. It was, in many ways, a rock-star like existence, he says.

But he began to feel that he was living at a distance from reality and not meeting his true potential. He thought about where he wanted to retire and what he wanted to be. Eventually, he decided that staying in Japan was not conducive to finding greater meaning in his life.

Fast forward to present day Auckland and Mackinven has become a successful property investor in both the residential and commercial spheres.

He has transacted over 200 deals worth tens of millions of dollars and currently has a 12-strong portfolio, including five commercial properties. He also runs a number of different propertyrelated companies. On a personal level, through property he has found a deep sense of purpose.

“I believe that as investors we are in a privileged position in society and, as such, we have a responsibility to care for the people and the properties that we are involved with. That means you invest in your tenants, as well as your properties, to make them better.”

Catching The Property Bug

However, the road he travelled to get there was not a straight-forward one. Originally, a small-town boy from the Waikato, property was not a huge part of his family’s DNA. His grandfather was a farmer and, growing up, he always wanted to be a wildlife ranger.

So when he headed off to Massey University he opted to study agricultural science. Unfortunately, his study just didn’t grab him and, mid-degree, he took off to do some travel. Along the way he fell in love with Japan and decided to move there. That prompted a return to New Zealand to finish off his degree and get qualified.

He headed back to Japan on completion, but the property bug had already bitten. At university he had dabbled in share market trading. Frustratingly, despite careful fundamental and technical analysis, he made little money due to a lack of control, he says.

“I started looking to property as an alternative. There wasn’t much information around but I read a Dolf de Roos book and attended a property investing seminar. And it was enough for me to make plans for a property investment – against the advice of some people around me.”

Mackinven bought his first property in 1994 before leaving for Japan. It was a three-bedroom cross lease in Ellerslie which cost $110,500. He paid the 10% deposit with his visa card limits. Interest rates were around 11% and the property was slightly cashflow negative.

His plan was to pay the mortgage down until it was cash flow positive over the first year and then hold the property until it was debt free. Initially, the plan didn’t work out as expected. “Interest rates went up to 14% after purchase so the cash flow actually went negative,” he says. “I paid down $20,000 from income. But capital appreciation occurred as expected, the income increased and I sold it for a very good profit over 10 years later.”

During his years in Japan, Mackinven bought several more properties. On returning to New Zealand, he fell under the influence of a charismatic trader, sold all of his properties except one and then lost everything. Floundering somewhat in the transition back to Kiwi life, he bought a motel and a trucking business. Again, it turned out that that type of business wasn’t for him and he cast his eye back to property.

“Then one week in 2006 I sold my trucking business and lost $30,000 on it. In the same week I managed to make $50,000 on a property deal. That was my major lightbulb moment. After that week I went into property fulltime and I’ve never looked back.”

Tackling New Challenges

After putting a solid few years in doing hands-on trading, he moved into aggressively purchasing buy and holds, mainly in Auckland. He ended up with a 30-plus property portfolio but started hankering for a new challenge – and better cash flow. That prompted his turn to commercial property.

Mackinven says he was keen to make the transition for a long time, but it seemed hard. Thanks to the mentorship of veteran commercial investor Lyn Chung, he built up the confidence to give it a go and bought his first commercial property in 2015. Since then he has built up a small commercial portfolio.

The properties range in type from small retail shop type buildings to medium size office buildings, while their values range from $1 million to $6 million. All the properties have multiple tenancies and are on freehold titles, except for one which is a unit title.

“Yields have all been around 9% on purchase price and, as I have fixed a lot of problems, I am sure that will have given me some capital gains. I am very careful with choice of location, so there should have been better than average capital gain. However, I have not had to get any valuations as I have low LVRs and capital gains is not my primary focus.”

But in his commercial portfolio, he does have a few favourite properties that he is keen to highlight.

One is a recent investment in Otara. The office property cost him $3,850,000 to purchase. Of the 2,795m2 floor area 2,368m2 is rented at $330,000 NET (8.6% calculated at a rate of $120/ m2). However, it had a few problems on purchase – the biggest being a 40% NBS seismic rating with a projected cost of $3 million to bring it up to 70%.

Mackinven says he saw opportunities in it as he felt all the problems were solvable. Ultimately, he was able to bring the building up to 70% NBS for $690,000. “This meant I could bring the property back to life and provide a workplace of pride for tenants and customers. But also the property is under-rented so when it’s time for a rent review, I’ll now be able to go for a market rent based on 70% NBS which is $210/m2. That’s a potential increase of $213,120/annum in rent.”

Another favourite is also an office building which he bought for $4.8 million in 2016. This one is a 2,400m2 building on a 5,500m2 of land in Otahuhu. On purchase, the property returned around 9% yield and it has had a decent rental increase since then.

“Also, I love the Otahuhu location generally, and because it’s on a big, flat site with lots of parking it has a strong, passive upside. It has a 130% NBS and I see lots of potential in it. It currently has strong tenants who have just entered another three year extension. The tenants won’t be there forever, but in 10 years it will be good for a conversion. It’s just spunky and ticks all the boxes.”

Super Size Considerations

As he expected, Mackinven has found there are big differences between residential and commercial investing.

“In commercial it’s like everything is on steroids,” he says. “There’s big numbers including big cash flow but also big risks. I have always operated in the value add space in residential which means solving problems.

“But the problems that need fixing in commercial are much bigger. For example, the seismic upgrade of a newlypurchased building required a close to $1 million spend, including the HVAC upgrade and roof works.”

Differences are also apparent in the way strategies need to be applied and investments approached. Mackinven’s investing philosophy has long revolved around an equation which puts the true value of a property as its market value plus or minus any hidden value.

Hidden value can be either active (for example, a tired property that needs renovation or an under-rented property) or passive (for example, a suburb undergoing a transformation). But it is necessary to identify the hidden value in properties and convert that hidden value into profit.

While this equation remains true in commercial property, the elements that need to be taken into account are, again, far more complex than in residential, he says.

“You have to compare properties in various areas, the square metre rental rate across different buildings in different areas, leases, factors like parking and chattels condition, and yields. Plus a more in-depth risk analysis of both the tenants and the buildings needs to be undertaken.”

Mackinven has encountered some challenges while building his commercial portfolio. A significant one was a Glendene property which he bought for $900,000 – ostensibly $500,000 below the auction reserve price. But both supposedly “stable” tenants left less than a year after purchase and the building sat empty for over six months.

“In the end, I took the bull by the horns and converted the property into shared office space and the premises are now full and the return is better than the 9% it was on when I purchased it in 2016. Often if you are faced with a problem, it can be a blessing in disguise. It’s about embracing that.”

However, that particular situation emphasised to him that it is critical to have strong cash flow across a portfolio and to buy good buildings in good locations, as well as the importance of getting to grips with the fundamentals of a property.

What Lies Ahead

Despite over-seeing the running of his entire portfolio, Mackinven says he actually seems to have more time on his hands these days. He plans to fill that extra time by building up his various businesses – including Wealth Ladder, which has an online learning platform for property investors – and doing more work with Japanese investors in the commercial space.

Having conquered his youthful aversion to study, he also wants to employ himself by studying philosophy and economics to make himself a better investor.

“Landlords have been entrusted with a significant role in maintaining the stability and improving the fabric of the society that we inhabit. When we get beaten up by the media, the government or society, it is more reason to act more justly, responsibly and compassionately.

“I think it comes down to empathy and a sense of responsibility for society. Do you use your profits solely for your own gain or do you think about what you can do to balance those gains for society? I believe in karmic law – good and bad. Every action has a reaction. So do good and good will come back to you.”

Related to this philosophy is his belief in the need for tenacity as an investor. “People often over-estimate what they can do in a short period of time and underestimate what they can do in a long period of time.

“But it’s important to have faith in those small incremental gains. They are stepping stones towards the future. Life is hard and there are lots of knockbacks but having the confidence to keep going and dealing with those knockbacks and keep working towards a goal. That is key to becoming a successful investor.”

Top Tips For Commercial Investors

  1. When looking at properties apply this equation: True value = market value +/- hidden value. Get better at identifying hidden value in properties and converting that hidden value into profit.
  2. Don’t buy cheap for cheap’s sake: Identify properties that are cheap for a good reason, such as high vendor motivation or a problem that you can fix.
  3. Study books on commercial property investing: Dolf de Roos and Olly Newland’s books are a good starting place. Also, study Ricardo’s theory of economic rent – it’s critical to understand.
  4. Management advice: Care for your tenants. Give them the respect that they deserve. That doesn’t mean being a pushover though. Commercial management requires an even higher level of professionalism than residential.
  5. Tenant selection: There is nothing more important. Only 50% of businesses are around after five years. It’s our job to choose winners and support them to prosper.

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