Commercial Property

[kalovatt]

I was wondering if there has been any threads or discussions here anywhere on commercial property.

I have had a wee hunt but can't find anything.

The reason I ask is that I am having a serious think about selling up a large proportion of my IP's and going into commercial property. There seems to have been a belated price surge (due to the ripple effect) in Sth Akld and the yields are now such that it is becoming an attractive option to take the capital gain and go for a large multi-tenanted commercial option.

I am busy researching this as much as possible and have a couple of avenues to proceed down, just wondering who else is contemplating this or has done this.

[Glenn]

This is my sort of investing.
Not for the faint hearted though.
I was chatting to a friend of mine tonight who has a number of commercial properties plus a few residentials like me.
His comments mirrored what I believe that over the last few years there has been far better capital growth on residential. My experience is limited to 15 years but he has been in it far longer.
But despite the difference in capital growth the net returns from rents have been far better with the commercials.
The industrials have not had much rental growth but the retail and office accommodations have had good rental growth.

[donna]

I know 'KPI Commercial' comes out this month - the first issue.

Let me know if in time you think we need a 'commercial property' forum - we will happily oblige.

There's also been quite a lot of interest in this book in our bookstore - it's a new release:

http://www.propertytalk.co.nz/book-126.html

The link also shows comments from a forum user that's read the book.

Cheers,

Donna :P

[casacamo]

I am also interested in moving to commercial property investment
to add to my residential portfolio.
Most of the new developments I have been looking at seem to be
way over priced for the return offered, sometimes not even
+ve cashflow.
I understand most expenses are covered by the tenant - does this
include maintenance ?
Do you need to use a different calculation to work out yeild on commercial buildings.

Is it better to look at Older properties, obvously mantenance is a issue with older buildings, but something in a good location, close to airport,
motorway etc. - entry costs might be lower.

What is the market like outside Auckland, eg, Hamilton, Tauranga,
Rotorua.

I would be interested in comments from others with experience.


Casacamo

[Rampage]

Hi all,

I have invested though shares with a small number of friends in a company set up to buy a commercal property. The growth in rental and capital growth as been great as the town has one of the highest population growth rates in NZ, kapiti road (Kapiti Coast).

I have put no money in the property apart from my initital outlay, with the rent covering all expenses and tenants paying for rates and insurance. Which has also enabled the company to acummulate a "slush fund" for periods when the property is untenanted which has never been for a prolonged period of time.

We are looking to sell and have signs in front if anyone is interested I can send then some futher details.

rampage

[donna]

Umm Rampage if it's a good little investment why are you selling - it sounds too good to be true?

Marc & I live in Kapiti - which building is it on Kapiti Road?

Cheers,

Donna :P

P.S. and how much is the asking price? ta v much

[kalovatt]

Thanks for the responses so far. I am aware of the "less capital growth but better yields" syndrome of your typical commercial property, but that is what I am after. Thats why I bought in Sth Akl all those years ago.

We completed a detailed analysis on our existing stock and found we are netting about 5.6% on our rentals. Comparing that to a net yield on commercial of around 8 or 9% (I think I am correct in those figures - for Auckland anyway).

After over a decade of static house prices for our rentals, the last couple of years has seen them double (and heading for a tripling) of capital values, but no corresponding rental increase. And I don't think rents can move much beyond what they are now, there is only so much the average worker/beneficiary in these areas can afford.

So far my research is encouraging, I have actually found a commercial broker who can fund up to 80% if needed at around 9.2% floating, and I like the fact that the tenants pay all outgoings in most cases.

A major concern of mine was what if the building goes vacant and you still hold a significant mortgage on the building. They can take months to re-let and in the meantime you are carrying the can. So far 2 solutions seem to be used: 1) Get a multi-tenanted building so if 1 tenant moves on, there are others remaining who will ease the burden till its re-let, and 2) arrange finance to fit the existing tenancy, eg if you get a building with a 10 year lease, then structure things so that you get a 10 year P and I loan so that when the lease ends you are mortgage free on the building (my preferred option).

All this is not as simple as made out of course but so far I am encouraged.

I am about to read the new book DonnaK thanks, so that will help fill things in.

[Glenn]

I am always a bit wary telling people that commercial is just so much better than residential. Although plenty of people do just that.
Here is what a few others recently said could be achieved in some cities

Auckland 8 - 9%
Hamilton 7.5 - 8.5%
Rotorua 8 - 9.5%

with around 6-8% in Nelson.

I have been casually looking recently at Christchurch and Wellington and it appears to me that Wellington might have a bit more going for it at the moment re growth of the civil service and boming retail trade.
Chirstchurch always seems to have a good track record also but there seems to be a large number of spec small commercail units being built and sold empty.

About 5 years ago the best deals were over $500,000 this figure soon moved to $1m and now the defining figure seems to be around $2m
By this I mean that the average mum and pop investor gets left behind at these figures and suddenly the ROR's go up. Small investors can still get into the market for these bigger properties via syndicates though.

Not all syndicates are equal and they can be a real problem if things start turning bad. Like no tenant. Also unlike Own your own properties it is not possible to refinance to take your capital out and buy again.
If the syndicate is big you have no input and control. Perhaps this is a good thing for some people!

I am of the opinion that over the last few years the percentage growth of residential rents has been better than industrial and some commercial.
I also think that over a long period residential will always be able to be let or sold much easier than commercial / industrial.
Still I do have some 10, 12, and 14% net ROR commercials and it sure is pleasant getting those monthy large dolups of money in the bank with few heart aches.

[Rampage]

-Umm Rampage if it's a good little investment why are you selling - it sounds too good to be true?

The people I invest with are older than me closer to retirement and are keen to make other lifestyle choices with the money. I could take it or leave it myself.

-Marc & I live in Kapiti - which building is it on Kapiti Road?

not sure actual number Milne drive address, used to have stones electrical and dive shop as tenants, about 4 buildings towards the traffic lighs from mitre 10. has for sale signs out front. The western link road is going to go next to it (one day), creating a corner site with more traffic.

-P.S. and how much is the asking price? ta v much


asking over 1 million

regards.
[/quote]

[Julian]

Rampage,

What is the rent return, and lengths of the leases - not including any ROR?
What is the land area, and
what is the building area?
What is the rent per square metre?
How does the rent compare with similar buildings?
What is the age of the buildings?
What is the construction of the buildings and roof?
What condition is the roof in?
What is the general condition of the buildings?
Do they have any water leaks?
Do the leases contain personal guarantees?
Are the tenants paying all the outgoings?
What is the financial strength of the tenants?
What sort of an investment do the tenants have in fit-out?
What is the location like?
Are there many similar buildings in the area that are vacant?
Is it a main arterial road?
What are the council plans for the area?
What are the rates (for when/if vacant)?
Have you had the building valued recently by a registered valuer?
Are there any carparks for customers and for staff?
What is access like?

Either PM me or post the reply here. I have posted these questions here because these are the sorts of considerations (and this list is by no means comprehensive), that people who make the switch from residential to commercial will have to consider.

Those who only consider yield may be in for a caning. Don't forget also that costs can be considerably higher for commercial. For example, a valuation for a building of mine in Hamilton cost nearly $1900. I have had mortgage brokers charge me 1% commission for finding me some loot and the loot came with an additional 0.75% loading over residential rates.

It's a good field to be in, but like most things it's not for the unwary. Banks generally don't like to commit to more than 65% LVR without additional security. And finally, don't forget what happened to many of the property investors after 1987. In fact, I have heard it said that if you were in commercial property in the eighties and you didn't go belly up after the crash you weren't really in it in the first place!

The silly behaviour of today is not the same as the silly behaviour of the eighties, but it is silly all the same. Don't get caught up in something that strips your wealth back to nothing. Be careful, and do your due diligence.

Remember the bulls go up the stairs, but the bears jump out the window. And when the bears start jumping the banks freak out.

Personally my gearing is at 50%, and quite frankly I would be a lot happier right now if it was 40%. When the market goes mental I get nervous - and borrowing funds at 9% to buy something returning 7% is mental, unless there is some obvious way of improving the situation in the short term. Buyers right now are placing their buying decision on "the bigger idiot theory". They say "I know this doesn't really stack up at a 7.5% return but I'll buy it anyway and look out for someone to offload it at for 6.5%. For those that don't understand this last statement look at it this way: Assume rent of $75,000pa. A buyer pays $1m for a 7.5% return. He tries to find an even bigger idiot to buy it for $1,150,000 giving the new buyer a 6.5% return. This is "The Bigger Idiot Theory".

Julian.

[Rampage]

Julian let me try to answer a few of the quetions.

What is the rent return, and lengths of the leases - not including any ROR?
I'll check

What is the land area, and what is the building area?
I'll find out 1500sqm rings a bell for the land

What is the rent per square metre?
market value $150

What is the age of the buildings?
a little over 11 years i think

What is the construction of the buildings and roof?
iron roof

What condition is the roof in?
great

What is the general condition of the buildings?
sound

Do they have any water leaks?
not sure

Do the leases contain personal guarantees?
not sure I didn't know people did that.

Are the tenants paying all the outgoings? yes

What is the financial strength of the tenants? not sure

What sort of an investment do the tenants have in fit-out? get back to you

What is the location like? excellent

Are there many similar buildings in the area that are vacant?
not to my knowledge if anyone drives down kapiti road in the near future can you let me know.

Is it a main arterial road?
yes

What are the council plans for the area?
Road (western link joining raumati south to peka peka, kapiti coast)

What are the rates (for when/if vacant)?
I'll find out

Have you had the building valued recently by a registered valuer?
prospective buyer is getting a valuation done in the next few days I will let you know the value and comments.


Are there any carparks for customers and for staff?
Yes around 5 carparks

What is access like?
good easy


We have a space for lease so we can either have a clase in the contract when we sell to find a tenant. Or would suit occupier.

Rampage,

Sorry for the slim details I will get some photos and concrete details if anyone is still interested.

[donna]

Yes please Rampage keep the information coming. Julian thanks a lot for asking better questions.


Cheers,

Donna :P

I'll be checking it out tomorrow - from the outside, and will drive down Kapiti Road re. any other commerical real estate up for sale.