Commercial, Leasehold

[Anthonyacat]

Hi All

After major personal milestones (which result in financial setbacks) including a home renovation and preparations for a baby, I'm once again looking to take the first steps into commercial property. Among the enormous prices and tiny net yields, I keep coming across high net yield leasehold commercial properties, primarily in Rotorua and the surrounds.

Now, I don't touch residential leasehold, ever. The land is where almost all the value in a home is stored. But in Commercial property the value is usually seen to be in the rent attainable. Can anyone with a bit more experience tell me why properties such as those on Eruera Street in Rotorua with 12-13% net yields (21-24% Gross), wouldn't be a good move?

Some of the lower value ones in the $200-300k area could even be leveraged mostly or entirely off my residential properties, so no problem with commercial lending terms and 10-year principal paybacks - though at 13% net yield, you'd be able to handle a 10-year principal payback anyway.

Thoughts, please?

[Don't believe the Hype]

Speak to beano - he is the expert on this topic

[Halfway To Paradise]

Hi All

After major personal milestones (which result in financial setbacks) including a home renovation and preparations for a baby, I'm once again looking to take the first steps into commercial property. Among the enormous prices and tiny net yields, I keep coming across high net yield leasehold commercial properties, primarily in Rotorua and the surrounds.

Now, I don't touch residential leasehold, ever. The land is where almost all the value in a home is stored. But in Commercial property the value is usually seen to be in the rent attainable. Can anyone with a bit more experience tell me why properties such as those on Eruera Street in Rotorua with 12-13% net yields (21-24% Gross), wouldn't be a good move?

Some of the lower value ones in the $200-300k area could even be leveraged mostly or entirely off my residential properties, so no problem with commercial lending terms and 10-year principal paybacks - though at 13% net yield, you'd be able to handle a 10-year principal payback anyway.

Thoughts, please?

Most of Eruera St is on leasehold land. Once that paid yield is a lot lower.

[Anthonyacat]

I'm well aware that it's leasehold; but no, as I've said above the yields are 21-24% Gross, down to 12-13% AFTER paying the ground rent. I'm struggling to see the downside.

[Wayne]

I'm well aware that it's leasehold; but no, as I've said above the yields are 21-24% Gross, down to 12-13% AFTER paying the ground rent. I'm struggling to see the downside.

What are the leasehold terms? When renewed and the new rate is calculated how?

[fuzzlevalve]

Isit like residential Anthony where as the lease renewal gets closer the value drops dramatically and the yield goes through the floor on the new lease?

[Anthonyacat]

What are the leasehold terms? When renewed and the new rate is calculated how?

In general they're renewed every 7 years; most of them are renewed fairly recently. One that I'm looking at has a ground lease of $15k renewed last year up from $14k. Tracking the lease back to commencement in the 70s, the rate of increase is remarkably reasonable. Calculated based on unimproved value of the land, but there's no 'fair rate of return' formula like in Auckland.

Isit like residential Anthony where as the lease renewal gets closer the value drops dramatically and the yield goes through the floor on the new lease?

It doesn't appear to be. The above property I watched was going for about $190k with six months before the lease renewed, and is now going for $185k.

[fuzzlevalve]

It doesn't appear to be. The above property I watched was going for about $190k with six months before the lease renewed, and is now going for $185k.

But that's the point isn't it. Currently it is returning say 24% gross and 13% nett right? In 6 months once your lease goes up then what is the yield?

[Wayne]

But that's the point isn't it. Currently it is returning say 24% gross and 13% nett right? In 6 months once your lease goes up then what is the yield?

The ground lease was renewed last year so 6 yrs to the next.
His 6 month comment was in relation to the price.

[fuzzlevalve]

Oh OK sorry. I guess you have to know what the likely value is going to be in 6 years then. No point buying a 13% yield now if you are going to lose more than that in 6 years if you want or have to sell?

[Wayne]

Oh OK sorry. I guess you have to know what the likely value is going to be in 6 years then. No point buying a 13% yield now if you are going to lose more than that in 6 years if you want or have to sell?

I think the point was that the change in the last review was small and based on unimproved land value which maybe doesn't change in Rotorua like it does in Auckland.

[Anthonyacat]

I think the point was that the change in the last review was small and based on unimproved land value which maybe doesn't change in Rotorua like it does in Auckland.

Exactly. It was a while ago I did the calculations, but I looked back to lease commencement in 1970 or whenever, and I think the average compound increase was about 2.3%. Entirely reasonable - laughable, even, considering this period encompasses the inflation-ridden 80s.

[Bongi]

Just wondering if you ended up buying this property? I am also considering a leasehold property and wondered what things to look out for.?

[Anthonyacat]

Just wondering if you ended up buying this property? I am also considering a leasehold property and wondered what things to look out for.?

I did not. I went in and bought a "managed business" which was an absolutely terrible idea and has gone horribly. Trying to get out of it for months now and will end up having lost $100-200k.

But that's another story, and in a few years am sure itll be less sore.

In regards to leasehold, just be super careful on lease terms, specifically how the lease increases are calculated.

And make sure your yield is extra-awesome, because your capital gain will be pretty muted as you dont own any land.

[DaveW]

I haven't seen this thread before but if you're considering a lease-hold property don't be fooled by the small increments in ground rent every 7 years or so. There is a termination to the ground lease say 50 years, from which date the rent could then jump up massively. Be very careful in reading the find print of the lease documents with your lawyer.
Another disadvantage is a bigger deposit is usually sought after by lenders.
The big yields might be attractive to someone who wants to be less active and just retire on the interest of their fortunes, but owning lease-holds are not the same wealth builders you can achieve from freehold property.