Investment’s golden child

Investment’s golden child

Total Property - Issue 1 2020

With term deposits delivering after-tax returns barely above inflation, and surging capital values lifting many residential properties beyond $1 million, many small investors are considering new alternatives.

This has led to an uptick in inquiry for commercial and industrial property, which can provide attractive returns with long-term rental income and good capital gains. It has compelling advantages, such as entry-level prices as low as $300,000, longer leases and tenants paying the outgoings.

At any one time, there are more than 1.2 million square metres of commercial space for sale across New Zealand, including warehouses, offices, shops, hotels, showrooms, car parks and bare land.

As the economy has thrived over the past decade, so has commercial and industrial property and it has been a golden opportunity, particularly in the $1 million to $2 million range.

Commercial and industrial property in New Zealand delivered average total returns of 11.8 percent over the past year, continuing a trend which has seen it consistently generate double-digit returns for 15 years, according to MSCI figures.

Coromandel-based new investor Chris Wornall has bought two adjacent commercial properties in Whitianga in the past three years: the picture theatre and two shops in one building, and a popular cafe and two other tenancies in the other.

“Investing in commercial property is an area that suits and interests me. I can put a lot of energy into it and manage the properties by phone or online.”

Wornall says his first purchase, in 2016, of the picture theatre and two adjoining shops on Lee Street, for $1.9 million, has done well. The shops are leased by Bedpost and Liquorland, and he has enhanced the movie theatre with new seating and a liquor license.

“The entire property has been performing well since those enhancements and it has been a good investment.”

He bought the adjacent building on Albert Street in 2019 for $1.3 million. This is leased to Tides cafe, Tech Solutions and Lost Springs, a tourism business which sublets the main part of the tenancy to insurance-broking company Aon. The tenants were paying annual net rent of $69,221 on the 313-square metre property at the time of the sale.

“I thought the price for the Albert Street property was steep but, within three months, bank interest rates on term deposits and savings had dropped substantially, and it is now looking like a good buy.”

Extensive due diligence, looking at risk management, researching tenants and consulting his lawyer and accountant, helped him secure the property for a price at which he was comfortable.

He looks for a building as close as possible to being prime real estate – modern, solid, in a main street, near parking, with high foot traffic and strong national tenants if possible. Rent reviews on both properties are tied to market rates, but he likes to negotiate with tenants.

When a multi-tenanted, trades-based unit property was put on the market in Kopu, near Thames, in 2019, a Tauranga couple bought it as their first industrial investment.

The couple have two commercial properties in Tauranga and wanted to diversify. They invested because the 3,625-square metre property was “accessible financially and geographically”.

They carried out exhaustive due diligence as they sought longevity, current viable leases, a reasonably new building and solid structure. They also sought a property de-risked in terms of natural disasters, future planning and contaminants being brought onsite. A geotech report on ground works was also obtained.

The property was attractive as its five units are fully tenanted, paying at the time of sale yearly net rent of $110,000. They didn't want a high-maintenance property and Kopu is expected to expand with the Provincial Growth Fund approving $270,000 towards a business case investigating it as a centre to support marine servicing.

They say the tenants are easy to deal with and pay all outgoings.

Nick Gentle's company, iFindProperty, whose property finder and buyer agent service sources residential rental property with potential for strong cashflows and equity increases, has seen an increase in inquiries about commercial investment.

“They are looking at other ways to invest, such as syndicates, property funds and direct investment,” Gentle says.

“But many are nervous of standalone commercial and industrial properties because of the 50 percent upfront stake demanded by the banks, higher interest rates and the risk of having an untenanted building for a significant period.”

However, the company is promoting to its clients two units in a Hamilton light-industrial, 20-unit property with prices ranging from $300,000 to $500,000.

“There has been a lot of interest and curiosity about the development and we are working with six active clients.”

Read more market insights from Total Property

Subscribe to receive the latest commercial news and insights from Bayleys Total Property