INVESTING IN COMMERCIAL REAL ESTATE - Commercial Property Investment in New Zealand - Property Brokers
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INVESTING IN COMMERCIAL REAL ESTATE
A GUIDE TO:
Commercial Property Investment in New Zealand
Property Brokers MREINZ Licensed under the REAA 2008 www.propertybrokers.co.nz
Commercial Property Investment 1
INVESTING IN COMMERCIAL REAL ESTATE
There are a few things you’ll need to ask yourself before taking the plunge into the world of commercial
property investment in New Zealand.
• What am I looking for?
• How much it is worth?
• How does the process work?
• How long has the lease to go?
Generally commercial property investment offers A factor to consider before investing in commercial
investors good opportunities to make stable long term property in New Zealand is the option of tax write-
returns. Returns are generally higher than for most offs. If your company is profitable, property ownership
other forms of investment, including other property can help reduce your taxes. You should be able to
investments. Income from rental yield is strong, and write off a part of the building’s annual costs through
commercial properties rely less on capital gain to depreciation. Another option is to purchase the building
provide value for their investors. personally and rent it out to the business. This is a
method that has some tax advantages.
Commercial Property Investment 2
CONTENTS
Is Commercial investing for you? 4 Capital Growth 12
Where to begin? 5 What Cap Rate should I aim for? 13
How much deposit do I need? 6 How do I know when is the right time to buy? 14
Types of Commercial Real Estate 7 Conditional Contracts and Due Diligence 15
Commercial vs Residential investing 8 Do I need a Property Manager? 16
Investing in Commercial real estate 9 Top 7 tips for Property Investment 17
What makes a good property investment? 10 Conclusion 18
The Lease 11
3 Property Brokers Commercial
IS COMMERCIAL INVESTING FOR YOU?
If you answer YES to any of the following questions, then this booklet provides a good start.
1. Have you acquired excess capital over the years?
2. Have you recently come into money?
3. Are you looking for a retirement plan?
4. Are all your financial eggs in one basket (the farm, family home)?
5. Do you wish to help your family financially in the future?
6. Are you fed up with owning Residential Property investments?
7. Do you have an interest in commercial real estate?
8. Are you a tenant paying rent?
Commercial Property Investment 4
WHERE TO BEGIN?
Ownership Options
Options for buying a commercial property in New Zealand include:
• Buying as an individual
• Buying as a partnership
• Buying through a company
• Buying through a Trust
• Buying in a syndicate
Your professional advisors will help you decide which option or business structure is best for your circumstances.
35 Property Brokers Commercial
HOW MUCH DEPOSIT DO I NEED? Before investing in a commercial property, you’ll want to learn more about the market and opportunities around New Zealand. Start looking on www.propertybrokers.co.nz, www.trademe.co.nz or www. realestate.co.nz under the commercial section or in the newspapers. Talk to your commercial real estate salesperson. Check with your Bank or Lender but generally work on the Banks lending 60% to 70% on the value of the property depending on your financial situation. Commercial Interest rates are higher than residential rates. Commercial Property Investment 6
TYPES OF COMMERCIAL REAL ESTATE
• Offices – these come in all shapes and sizes, anything from a single floor to the entire building
• Retail – either a standalone building or a block of shops however there are buildings with retail on the ground
floor and offices above
• Light Industrial – usually comprise showrooms with warehouse at the rear or workshops
• Heavy Industrial – situated further out of the town area and vary from warehouses to large distribution centres
• Motels – sizes vary considerably from 6 units to 34 units (Freehold or Leasehold)
• Hotels – variations from country pubs to inner city luxury hotels and serviced apartments
• Businesses – a wide variety of business options are available
7 Property Brokers Commercial
COMMERCIAL VS RESIDENTIAL INVESTING Residential real estate has the three L’s location, location and location. Commercial real estate also has the three L’s LEASE — LESSEE — LOCATION! This indicates how much importance is placed on the lease. Whereas residential property has an inherent value, based on the area it is located, similar houses in that area combined with average rents in the area — the capital value of commercial property is largely dependent on its yield (or cap rate in commercial property terms). Commercial Property Investment 8
INVESTING IN COMMERCIAL REAL ESTATE
• Commercial property does not come under the Residential Tenancies Act
• Tenants in general, pay the outgoings (rates and insurance etc.)
• Tenants are reliable for most internal repairs, and often refurbish their
buildings
• Tenants are less likely to default on rental payments
• In a commercial lease, what you agree on and sign, is binding
• Lease agreements are generally long term (years)
• Returns are generally higher than for most other forms of investment
• Commercial properties rely less on capital gain to provide value for their
investors
• Banks are not prepared to lend as much on commercial property
• Returns are better from commercial property because the rental returns are
generally net (includes outgoings).
9 Property Brokers CommercialWHAT MAKES A GOOD COMMERCIAL PROPERTY INVESTMENT? Location Look for properties close to transport and infrastructure, with parking facilities and appropriate businesses around it. Building Are there opportunites to add value? Does the building have the appropriate facilities to attract and keep ideal tenants e.g. stud height, airconditioning etc. Check your insurers approve the building, particularly if pre-1935. Land How big and is there room to extend the building. How much parking and is there room for a truck to get in and out. What zoning does the land come under and which uses are permitted there? Tenant Look for tenants that are reliable, willing to sign a long term lease, present a low risk of default on rental payments and have been in business for a while. It is not recommended to buy an investment solely on the strength of the tenant alone as they come and go. Commercial Property Investment 10
THE LEASE
• How long is the lease term?
• Are there rights of renewals (more beneficial to the tenant than the landlord)
• How often is there a rent review and how is it structured
• Is there a ratchet clause or partial one. Many leases have a “hard ratchet” clause, which means that the rent
can never go down, even if market rents have fallen generally. Some have a “soft ratchet” clause which
requires a rent reduction if market rents fall, but prevents the rent from falling below its original level
• Does the tenant offer a personal guarantee?
• Chattels — who owns what
11 Property Brokers CommercialCAPITAL GROWTH
Appreciation in the capital or market value of Capitalisation Rates (Cap rates) or Yield
an investment, as opposed to income derived
from the investment. Those who invest in real estate via income producing
properties need to have a method to determine the
It is the difference between a higher selling value of a property they’re considering buying.
price and a lower purchase price, resulting in
a financial gain for the investor. Example
Net rental $40,000 per annum plus gst
Sale price $500,000
Cap Rate = 8% return per annum
Commercial Property Investment 12WHAT CAP RATE SHOULD I AIM FOR?
Cap Rates will vary considerably depending on Example
the location, town, market conditions, lease term,
Tenant International Tenant - Low risk
strength of tenant and timing.
Location City, CBD, high foot traffic
Lease term 15 years with Rights of renewals
Getting the right capital growth/yield mix is a
Market Hot
balancing act — going for great capital growth but
Cap Rate 7% return on investment
not tipping the scales so far that it all topples over
because you can’t afford to hold your properties.
Example
As a long term investor, the goal should be to Tenant Local tradesperson - High risk
maximise capital growth. Yield is essential to the Location Town, secondary location, no profile
survival of the portfolio, but it is not the key to Lease term 2 years with Rights of renewals
building wealth through property. Market Average
Cap Rate 11% return on investment
13 Property Brokers CommercialHOW DO I KNOW WHEN IT IS THE RIGHT TIME TO BUY?
Do a market analysis in the area you are looking to buy in.
The old adage goes that its time in the market, not timing the market. The more time you hold your property, the
more time it has to grow.
Depressed market Hot market
• Are there mortgagee sales? • Are buildings being sold before going to the
• Does the retail sector have many vacant market?
shops? • Are you missing out on buying with your offers
• Are the retailers having more than usual sales? being too low or not acting fast enough?
• Are retailers having ‘closing down’ sales?
• Are the cap rates lower than usual?
• Are there For Lease signs on many buildings?
• Has the job market slowed down or petrol • Are the interest rates low?
prices going up? • Very few properties available for sale?
Commercial Property Investment 14CONDITIONAL CONTRACT & DUE DILIGENCE
You now have a property under contract. That means you contractually have the right to buy the property, providing
that you are satisfied with the conditions negotiated in the contract, namely due diligence.
As a minimum we suggest the following due diligence:
• A valuation by a valuer that specialises in commercial real estate valuations
• Finance clause
• LIM – Land Information Memorandum (Issued from local Council)
• Builders and/or Engineers report
• Lease and Title – have your solicitor check the lease and title
• Check with your insurance company. Are they prepared to insure the property?
Investing in Commercial property really does offer some great rewards. Take care to do your research and talk to the
experts first.
15 Property Brokers CommercialDO I NEED A PROPERTY MANAGER?
The answer depends on your personal situation. What are the benefits or downside of managing
your own portfolio?
What will they do?
• Negotiate rent renewals, new leases and do Property investment is not rocket science
the paperwork and you don’t need a three day seminar
• Ensure the rent is paid and up to date of theory. Figure out a good safe
environment to operate in, and then get
• Send tenants any accounts and ensure
going. Get advice along the way, and
payment of them
stay in the market long enough to see
• Arrange Compliance for your building some good gains. Stay focused on the
• Attend to maintenance that the tenant is not end goal.
responsible for
• Look for new tenants and do reference If your time is limited or you don’t
checks feel confident - then yes, employ an
experienced property manager to look
• Inspect the property regularly
after your valuable asset.
• Liaise with Real Estate agents, valuers
lawyers, accountants etc.
Commercial Property Investment 16TOP 7 TIPS FOR SUCCESSFUL PROPERTY INVESTMENT
1. Buy. Do something 5. Buy at a fair price
Most people fail at property investment because Accumulate great quality properties
they never take action at fair prices rather than
2. Buy to a plan fair properties at great prices
Develop a simple plan of action. Include a reason, 6. Buy for capital growth
vision and a strategy We need yield to service the debt
3. Hold for the long term but yield will not generate
The more time you hold your the wealth that gives you financial
property, the more time independence. Focus on properties that will
it has to grow generate above average capital growth
4. Buy what you can afford 7. Invest again when you can afford to
Stretch yourself but don’t kill yourself
17
15 Property Brokers CommercialCONCLUSION
You might have read all of the above and agree We have a dedicated team of compliance inspectors
with it but be thinking – I just don’t have the time who provide services in regard to Building Warrant
or the confidence. of Fitness and Compliance and are IQP registered
who operate in the lower North Island.
Property Brokers have an experienced team of
Commercial Salespeople that list, sell and lease all Through our NZ Realtors network we can search
types of commercial real estate to help you with out investments throughout New Zealand.
that next step.
If investing in Commercial Real Estate sounds like
We also have a property management division you, then please call us today to discuss how we
where rental properties are managed on behalf of can help you get started.
absentee owners.
Commercial Property Investment 18“It’s tangible, it’s solid, it’s beautiful, it’s artistic,
from my standpoint, and I just love real estate.”
Donald J Trump
Sir Bob Jones earned his wealth through investments
in commercial property.
Robert Jones Holdings, formed in 1961, is one
of New Zealand’s pre- eminent privately owned
property companies with approximately $1 billion
of commercial and industrial property in Auckland,
Wellington and Sydney. The company has almost
500 commercial and government tenancies in New
Zealand and Australia.
19 Property Brokers CommercialCONTACT INFORMATION NORTH ISLAND SOUTH ISLAND HEAD OFFICE ASHBURTON 324 East Street 03 308 8204 PALMERSTON NORTH 236 Broadway Avenue 06 356 5122 AMBERLEY 115C Carters Road 03 314 9081 FEILDING 120 Fergusson Street 06 323 5544 RANGIORA 222 High Street 03 313 8022 FOXTON Cnr Main & Clyde Sts 06 363 0022 GERALDINE 1 Talbot Street 03 693 1315 LEVIN 1 Bristol Street 06 366 0880 GREYMOUTH 45 Tainui Street 03 768 7145 MARTON 312 Broadway 06 327 0070 TIMARU Cnr Church & Sophia Sts 03 687 7166 WANGANUI 200 Victoria Avenue 06 345 7714 WAIMATE 54 Queen Street 03 689 7171 TAIHAPE 83 Hautapu Street 06 388 0200 MATAMATA 79 Firth Street 07 888 6468 PAHIATUA 129 Main Street 06 376 8486 WOODVILLE 57 Vogel Street 06 376 5663 DANNEVIRKE 45 High Street 06 374 8102 NAPIER 19 Clive Square West 06 834 4255 HASTINGS 306 St Aubyn St West 06 873 0135 HAVELOCK NORTH 17 Havelock Road 06 872 7037 TARADALE 371 Gloucester Street 06 845 9101 CLIVE & COASTAL 187 Main Road 06 872 6015 WAIPUKURAU 63 Ruataniwha Street 06 858 7280 MASTERTON 84 Chapel Street 06 370 0701 CARTERTON 19 High Street 06 379 6660 GREYTOWN 85 Main Street 06 304 8007 MARTINBOROUGH Cnr Ohio & Kitchener Sts 06 306 8484 The information contained in Investing in Commercial Real Estate is intended to provide general information in summary form, current at the time of printing. The contents do not constitute legal advice and should not be relied on as such. Specialist advice should be sought in particular matters. www.propertybrokers.co.nz © Property Brokers MREINZ Licensed under the REAA 2008 20
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