Tips for Commercial Property Investors
As with any Investment product, the investor needs to decide what they want. By this we mean, do you need stable income or are you just looking for a place to park your money for a rainy day? Or do you want to buy something you can add value to?
Income seeking Investors
If you are the person who wants to secure a stable income then the typical lease term signed by tenants at the commencement of their lease will be from 3 years to 9 years. In some cases tenants may sign longer leases.
Shorter leases are more common in smaller and lower value properties and 9 to 12 years leases usually occur in properties of higher value e.g. over $1,000,000.00.
If you are looking for income for say 6 years then you will need to be prepared to accept a return of around 8% on current market conditions. There are currently many more people looking for investment properties than there are products to offer our buyers. This means that returns are being held down. Refer to our page on Tenant's Guide for explanations of leases especially our explanation of the difference between Net leases and Gross leases.
Don't get too set on the precise return you need. This will vary form year to year particularly with gross leases. So if you tell us you want a return of say 8.5% by the time the first year has passed your return may well be considerably different from the return you thought you were buying the property for. For example, Insurance premiums the vendor pays will almost certainly be different to what you will pay especially if the vendor owns several properties where the premiums can be spread over his portfolio. Each year rates change and this affects your return. Also Landlords are almost invariably responsible for exterior maintenance and there can be different amounts to be spent from year to year on the exterior of the building.
Also the return that exists on the property at the time you sign the contract can be different from the return at settlement which with commercial property is typically three months after the contract is signed. So the point must be emphasized that if you purchase a property showing a x% return on the day of settlement, it is highly unlikely that this will be the actual return you receive in the first year. It is just as likely to be more as it will be less and variations could be 1% or more.
Property will not always be offered when the lease has just commenced but more likely it will be offered for sale when the lease is some years old.
Generally speaking the return is most affected in proportion to the length of lease remaining. However other imprtant factors are the status of the tenant, the state of the building, the location and releasability when the current tenancy expires, rent review provisions and other terms of the lease.
Add Value Investors
If you are someone who wants to "work" the property so the value will increase, then the return you receive will in most cases will bear no relevance to the return on a more passive investment. The ways to add value are many and varied but can typically be by adding to the building, renovating it, leasing up vacant sapce, changing its use e.g. from commercial to residential. Talk to us about the many ways you can add value.
"Rainy day" Investments
These investments can often be just land or properties with buildings that are largely obsolete but still have enough income coming from them to cover outgoings. Returns may be lower than form other investments, but there is the possiblity of substantial capital gain some time down the track which of course will compensate for the lower return you get in the initial years.
In New Zealand there is no capital gains Tax with some exceptions. Take more advice from your accountant on all Tax matters. The Inland Revenue Department will allow different elements of properties to be depreciated at different rates so your net return can be quite different from the return before tax. Consult your Plant and Machinery valuer or your accountant for a more in depth explanation. At the end of the day remember it is the money that actually comes in after all costs that is your return. Also remembember to treat your property as a separate entity just as you would treat a business as a separate entity.
Tips for Vendors
We are often asked by vendors as to whether or not a vendor should give a Sole Agency or General Agency. We are also asked by vendors what type of marketing method is the most appropriate for the sale of their property. Here are some of the answers for you