Commercial property white elephants

[donna]

Hi Pters,

It wasn't that long ago, investors were ditching residential in favour of commercial property. The question is - how's that working for you?

See this FT article (it's not behind the paywall) -

https://www.ft.com/content/60a67e2b-8f2c-4ca5-af47-efba143b8236

Commercial investors only buy if they can repurpose the building. Some investors are just handing their commercial properties back to lenders.

Back home, many residential investors jumped into commercial as soon as Labour targeted residential - I know one investor who bought some retail stores - and it wasn't his first dabble, but it wasn't long before he worked out he was on a highway to nowhere and sold them.

More entrepreneurial investors are saying there are opportunities in commercial if you change your approach to how they operate. In other words 'disruption'.

For example, forget fixed leases and instead rent the space to whoever wants it for as long as they need it. So pop-up stores, short-term leases on office space etc.

The only issue here is this approach will require a lot more hands-on time to manage the comings and goings.

It does make you wonder what will happen to large highrise commercial buildings - especially those that are deteriorating. Some may make it to apartments - most will probably be razed to the ground. Interesting times ahead!

cheers,

Donna

[Keys]

Sold a residential soon after the rules changed and repurposed the equity to buy, with new loans, lock up garages. A small but fruitful venture into commercial. The loan was residential and is now commercial. Roughly the same return with less hassle.

[donna]

^^ a good move and storage units too - consumerism is alive and well. There’s never enough storage esp in apartments and townhouses which developers are building in the hundreds and a lot of folk don’t know when to get rid of stuff.

Maybe commercial buildings are repurposed to lock up and storage units.

Your lock up garages would need good security systems.

cheers

Donna ????





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[donna]

Another good article from WSJ (not behind paywall). https://www.wsj.com/articles/how-to-...-rent-6ff4f9ec

Landlords become salespeople offering perks to attract tenants. Rents are rising at 1% - so not keeping up with inflation. Rent-free periods getting longer - up to 33% of the lease term.

Imagine giving your residential tenants nearly 3 years rent-free on a 10-year lease!

Cheers,

Donna

[Merlot Mike]

Hi Pters,

It wasn't that long ago, investors were ditching residential in favour of commercial property. The question is - how's that working for you?

I know one investor who bought some retail stores - and it wasn't his first dabble, but it wasn't long before he worked out he was on a highway to nowhere and sold them.

Hi Donna, when I decided to buy an investment property I went directly for a small industrial one so have never experienced residential. it's been great for me with a good return and minimal hassle. Why did the above investor have trouble with his retail units? Where they hard to tenant?

[donna]

Yield was not good enough and tenant’s business didn’t really recover post pandemic. Industrial sector still okay though just small retail and offices not so good - a global challenge for commercial landlords.

cheers

Donna

[Halfway To Paradise]

I sold most of my residential 3-4 years ago, I now only have 3 left. Started buying commercial properties about 5 years ago and now have 15 commercial tenants spread across 7 commercial properties (retail and offices). I have one commercial property empty and have it up for sale. I kept the 3 residential properties to keep borrowing costs down so that I did not get charged commercial rates. While capitol growth has not been as evident on my commercial properties I am getting really good cash flow. My vacancy rates have been low. Covid was a little challenging but we are well over that now. As soon as I see recovery in the residential market (thinking about in the next 2-5 years) I will be selling my remaining 3 residential properties and paying down debt on commercials. I am now after a less stressful life and commercial gives me this as tenants look after the properties and have a mutual goal of success with the landlord.

[donna]

^^ Location will always attract customers. Our little village is doing better than ever - due to remote workers - not sure cities winning though - lots of vacant shops.

cheers

Donna

[Beano]

^^ Location will always attract customers. Our little village is doing better than ever - due to remote workers - not sure cities winning though - lots of vacant shops.

cheers

Donna

How many buildings do you have in your village Donna?
is it a industrial park or shopping center or office park?

[donna]

I should do a count - it is Raumati Village. Unfortunately, since I last wrote - I've found out one Landlord has been buying up buildings in the village - and now he wants to raze one to the ground for a new 4 Square - (they already own one - and it's on a corner, so it gets good foot traffic). Their move will displace a few businesses, including a couple of small professional firms using offices on the top floor and boutique retail stores on the ground floor - with good foot traffic.

It's a negative move for the village - due to the location of the new 4 Square next to a school, and it gets congested before and after school - esp. foot traffic. The new 4 Square will have car parking in front (where the current building is), and cars will need to cross the footpath. Plus, they have plans to put a loading zone where the existing roadside parking is.

Unfortunately, the tenants have been notified their lease is terminated, and there's nowhere to relocate in the village. Some spent a lot of getting their store set up just a year ago.

I fear our village may go the way of many where real estate agents move in and there's the odd cafe. Fingers crossed the 4 Square doesn't get approval - for that location.

cheers,

Donna

[Beano]

I should do a count - it is Raumati Village. Unfortunately, since I last wrote - I've found out one Landlord has been buying up buildings in the village - and now he wants to raze one to the ground for a new 4 Square - (they already own one - and it's on a corner, so it gets good foot traffic). Their move will displace a few businesses, including a couple of small professional firms using offices on the top floor and boutique retail stores on the ground floor - with good foot traffic.

It's a negative move for the village - due to the location of the new 4 Square next to a school, and it gets congested before and after school - esp. foot traffic. The new 4 Square will have car parking in front (where the current building is), and cars will need to cross the footpath. Plus, they have plans to put a loading zone where the existing roadside parking is.

Unfortunately, the tenants have been notified their lease is terminated, and there's nowhere to relocate in the village. Some spent a lot of getting their store set up just a year ago.

I fear our village may go the way of many where real estate agents move in and there's the odd cafe. Fingers crossed the 4 Square doesn't get approval - for that location.

cheers,

Donna

Have there been more premises purchased for the new Four Square store Donna?
Is your tenant (s) affected yet ?

[Engineer]

Tax Tax Tax
Bastards

The Government is comfortable kicking commercial property owners when they’re down, taxing them an extra $575 million a year to help pay for tax relief for income earners and residential property investors.

Finance Minister Nicola Willis is standing by her decision to remove the ability for commercial and industrial owners to deduct depreciation as an expense when paying tax from April 1, 2024.

[Keys]

Tax Tax Tax
Bastards

The Government is comfortable kicking commercial property owners when they’re down, taxing them an extra $575 million a year to help pay for tax relief for income earners and residential property investors.

Finance Minister Nicola Willis is standing by her decision to remove the ability for commercial and industrial owners to deduct depreciation as an expense when paying tax from April 1, 2024.

My emphasis

Hellooooo?

You are surely stating that residential property investors are merely getting back onto the same playing field. Yes?

[Engineer]

Just pointing out that commercial building depreciation is going the way of the Moa.

From PWC

At the end of 2023, the Government announced its intention to remove tax depreciation on commercial buildings. The Government is expected to legislate this tax change in March 2024, with the intention that it will commence from the 2024/25 income tax year. The ability to claim tax depreciation was removed in 2010 and reinstated in 2020 as part of the Government’s COVID-19 Stimulus Package. The impact of ‘switching on’ tax depreciation from 2020 and then ‘switching it off’ again for the 2024/2025 income year will introduce commercial, tax and financial reporting complexities. In this publication we highlight key considerations business should be thinking about.


Tax considerations Implementing these tax changes will require entities to carefully consider which buildings will be impacted by the law change. Businesses will need to separate commercial building fit-out from the building structure in the tax fixed asset register, as fit-out should continue to be depreciable for tax purposes. In addition, when in the process of purchasing a building, it will be important to ensure the purchase price allocation splits out the building and fit-out for tax purposes. Changes to tax fixed asset registers may need to be considered. Implementing the change from the 2024/2025 income year means early balance date taxpayers eg. income tax calculations/returns


The deferred tax implication of this tax change will vary depending on whether a building was acquired before the 2010 law change, between 2010 and the 2020 law change, or subsequently and whether the initial recognition exception (IRE) was applied. For example, the IRE would have been applied to buildings acquired on or after the 2010 law change became effective (which switched off tax depreciation). However this was not the case for buildings acquired prior to the 2010 law change. IAS 12 does not contain clear guidance on how to deal with ‘switching on’ and ‘switching off’ situations where the IRE has been applied previously. As a result, after the 2020 law change (which switched tax depreciation back on again), different interpretations and divergences in practice arose in relation to accounting for the change for buildings acquired on or after the 2010 law change became effective. Therefore if the tax depreciation is switched off again in 2024, businesses will need to analyse and conclude on an appropriate accounting treatment for each ‘bucket’ of buildings depending on when these were acquired. It is also likely that thinking around how to deal with the IRE will develop rapidly, so it is important for businesses to stay across these developments.

[donna]

^^ can we get a link to this please we need to have it as the source of the content.

It's good information. Thanks for sharing it Engineer.

regards

Donna