Vacant possession units: The new one to watch

Vacant possession units: The new one to watch

Total Property - Issue 2 2018

New Zealand's industrial property market is experiencing strong demand, with the sector dominating the investment landscape and accounting for around half of the $6 billion of commercial property transactions last year, according to Bayleys Research and Data Insight The most sought after properties are prime assets that have long weighted average lease terms with strong covenants and are in prominent locations.

But with such opportunities becoming harder to find or obtain, buyers are increasingly pursuing industrial unit properties that have vacant possession or short-term lease expiry profiles.

While the term “vacant possession” seems relatively straightforward when talking about properties, it is actually a legal concept. It refers to a legal obligation which requires the selling party to guarantee that the property is fit to be occupied at that time or any other point of time.

Basically, selling a property with “vacant possession” means that the new owners can move in straight away or gain access to the property without having to wait for people to move out of the property.

Vacant possession units can represent great value and, for many, is an obvious first step in their entry to the commercial investment sector or the next step in expanding their current portfolio. They are seen an entry level asset class, and compared to other types of property, tend to attract a wider pool of buyer groups – from small investors and developers to family trusts and institutions.

Owner-occupiers represent the biggest buyer group by far. Typically, they prefer vacant possession because of the power it gives them over the future of their businesses. For many small-businesses, the psychological advantage of owning property in a rising market cannot be understated. Ownership frees them from the stress of lease renewals and rent reviews, real pressure points when inflation rises. It also increases their options for wealth creation.

There has been phenomenal capital growth in the industrial market, with a 5-7 percent return on investment and a capital growth of 7-8 percent as well.

Overall the average is close to 15 percent.

For investors, vacant possession units also represent good value in current market conditions - demand for space is high and interest rates are relatively low.

There are other advantages too. Because buyers aren’t inheriting someone else’s tenant and lease agreements, they can, from the outset, set terms that work best for them.

The asset class is not without its challenges, though.

With no tenant in place guaranteeing income, most lenders will require purchasers have 60 percent equity and insist on a higher level of due diligence.

Ironically, the fact that bank funding for vacant possession units can be harder to obtain than for other asset classes is one of the reasons they are at a more affordable price point. That’s a huge advantage for those who do have the equity available.

Most vacant possession industrial units coming to the market include a small office component and are between 200m2 and 1,500m2 in size, but can range up to 10,000m2 for significant industrial/distribution centres. Market activity is highest in established inner-city industrial precincts with good access to major transport routes and a wide range of facilities.

In Auckland, the introduction of the Unitary Plan has changed the fortunes of many small industrial fringe areas in inner city suburbs. The rezoning to Mixed Use has allowed owners the option to redevelop into higher worth properties. This has pushed demand for industrial units further south, north and north-west. The rezoning to Mixed Use could also help buyers reduce their overheads by turning part of a Mixed Use-zoned vacant unit into accommodation.

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