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  1. #1
    Join Date
    Oct 2013
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    1,628

    Default Commercial, Leasehold

    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?
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  2. #2

    Default

    Speak to beano - he is the expert on this topic

  3. #3

    Default

    Quote Originally Posted by Anthonyacat View Post
    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.

  4. #4
    Join Date
    Oct 2013
    Posts
    1,628

    Default

    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.
    AAT Accounting Services - Property Specialist Accounting - AATAccounting.co.nz
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  5. #5
    Join Date
    Jun 2004
    Posts
    10,415

    Default

    Quote Originally Posted by Anthonyacat View Post
    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?

  6. #6
    Join Date
    Sep 2017
    Posts
    193

    Default

    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?

  7. #7
    Join Date
    Oct 2013
    Posts
    1,628

    Default

    Quote Originally Posted by Wayne View Post
    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.


    Quote Originally Posted by fuzzlevalve View Post
    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.
    Last edited by Anthonyacat; 15-02-2018 at 12:05 PM.
    AAT Accounting Services - Property Specialist Accounting - AATAccounting.co.nz
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  8. #8
    Join Date
    Sep 2017
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    193

    Default

    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?

  9. #9
    Join Date
    Jun 2004
    Posts
    10,415

    Default

    Quote Originally Posted by fuzzlevalve View Post
    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.

  10. #10
    Join Date
    Sep 2017
    Posts
    193

    Default

    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?


 

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