Probably the best way to invest in commercial property in NZ is to buy shares in the well known listed property trusts (LPT’s) via the NZ share market.
By investing across the following four listed property companies (LPT’s), you will be widely diversified across the four main property types, and across dozens of buildings in each fund.
*Vital Healthcare Property Trust - owns hospitals and healthcare centres.
*Kiwi Income Property Trust – owns mainly shopping malls.
*Property for Industry – owns factories and warehouses.
*AMP Office Trust – owns office buildings.
* This is NOT a specific recommendation, rather an example of 4 companies that provide good diversification across the 4 main property types.
You can invest as little as $1000 into each fund, but $5,000 each or more would be more realistic and cost efficient.
Income – yield – rent – & capital gain
Property investment returns are a combination of the rent (yield) and capital gain. Looking forward the likely return might be;
8% Income + 0-1% capital gain = 8% to 9%
Returns have been affected by the global credit crunch – lower tenant demand and so lower rents. Tax has also increased as less depreciation can be claimed against taxable income.
Overall less demand, and more taxation so capital gains may be pretty low for several years.
If capital gain is going to be low or even absent, then investors would be wise to focus on yield.
The typical yield on a residential rental property is around 3% to 5% pa.
The typical yield of commercial property is around 6% to 10% pa.
Diversification & earthquake risks
Diversification is essential. If you diversify across bonds, property and shares on and offshore, you will never go far wrong.
The recent earthquake inChristchurchis a sad example. Imagine if you had all your money tied up in say 3 commercial properties in Christchurch. One might be badly damaged, one slightly damaged, and one OK. You would most probably not be able to collect rent on the badly damaged building, and even with the best insurance policy, you would be out of pocket one way or another. In addition any capital gain potential is very much reduced.
Diversification & other NZ Risks
If you have all your money tied up in NZ, you are at risk because you are fully exposed to the NZ economy. It is very narrow and could easily be de-railed if we import a major disease such as foot & mouth.
Diversification & Liquidity risk
Everyone needs liquidity or access to cash as emergencies do arise. Property is illiquid in that you usually cannot get cash out of it until you sell it, which can take several months to or even longer.
Bonds and shares are usually liquid which helps. However we recommend everyone holds some cash handy for emergencies.
Diversification & tenant risk
Demand is lower from tenants – just look around locally and count the number of vacant commercial properties – the number is surprisingly high.
But beware, even big name tenants move on. I remember seeing a big building touted widely in Hamiltonwith the IRD as tenant. However 6 years later the IRD’s lease expired and they moved to bigger more modern premises.
Six years can come around quickly and an empty commercial building has a very low resale vale.
If the owner has borrowings, then an empty building is an even bigger risk and headache – who is going to pay the mortgage ? Diversification is essential.
How much property do you have already?
Many Kiwis already have a lot of property by owning a nice home and sometimes a rental and/or a beach house as well. If you are a typical Kiwi, probably 70% to 90% of your total assets are tied up in property already.
All property values are affected by the NZ economy & events one way or other, so if you are heavily into NZ property, even if it is in different towns and different types, you may not be as diversified as you think.
Morningstar research recommend that most NZ investors who own a decent home or more should not put more than 10% of their money into property investments.
For global property diversification, a small allocation to the DFA Global Real Estate fund fits in well - spread across about 240 listed property trusts (LPT’s) around the world.
Warning – Avoid property syndicates
Most syndicates fail our 7 point checklist.
A few of these are still around and they are cleverly marketed, but all too often they are getting commission if you invest. It may be that selling you the investment is good for them, but it may not be good for you.
Syndicated property often looks good, with one or two big name tenants, but in fact are nearly always lacking in diversification. See the notes above about the IRD moving on when their lease expired.
Syndicates are not usually liquid, and you can only get out if you can sell your investment to someone else. Syndicates can have front end costs as high as 9% for advertising, legal fees, commission to the sales people, and so on. You will make no capital gain until the property has risen in value more than the front end costs and in a low capital gain environment, this could be several years away.
A lot of money has been lost in syndicates in NZ over the past decade. Generally speaking syndicates only suit small groups of experienced investors who can work closely together.