- buy a building which means in most cases you will need $500,000 or more
- buying shares in commercial property companies which you can do from $5,000 upwards
Commercial property is quite popular as an investment because it is bricks and mortar – tangible – and usually pays quite a good yield/rent. In addition most NZ commercial tenants pay the outgoings as well such as rates, insurance and interior maintenance.
Property usually rises in value over the longer term as well so capital gains are reasonably likely.
Property investment returns are a combination of the rent (yield) and capital gain, and are commonly about ;
6% to 7% Income + 0% to 3% capital gain = 6% to 10% pa.
Quite an attractive return when compared to bank deposits which are currently around 4%.
Unless you have a very large sum it will be difficult to get any sort of diversification. Just look around NZ at the empty buildings. If you own one of those, you would have to pay the outgoings yourself and get no income at all from your investment.
If you were diversified over a number of buildings and a number of tenants, you would have much less risk.
Geographical diversification is also important and the recent earthquake in Christchurch is a sad example. Imagine if you had all you money tied up in say 3 commercial properties on Christchurch.
It would be better to have one in Christchurch, one was in Wellington, and one was in Auckland.
It would be even better to have 10 or 20 buildings.
You can easily overcome the diversification problem
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 LPT’s, you will be widely diversified across the four main property types, and across dozens of buildings in each fund.
You can invest as little as $1000 into each fund, but $5,000 each or more would be more realistic and efficient.
ING Healthcare Property Trust - owns hospitals and healthcare centres.
Kiwi Income Property Trust – owns mainly shopping malls plus some office buildings.
Property for Industry – owns factories and warehouses.
Precinct Office Trust – owns office buildings.
The trusts pay a dividend (the rent) of about 5% to 6% pa. after tax and they are PIE funds which will save some tax for people on high incomes.
These funds are spread across anywhere between 30 and 100 buildings each, and in total property have something like 300 to 500 tenants.
These are four well known companies, but note this is not a stock picking or forecasting method – simply diversifying across the property market place since no one can pick the right property stocks year in year out.
Liquidity or access to money
Everyone needs liquidity or access to cash as emergencies do arise. Most property is illiquid in that you usually cannot get cash out of it until you sell it, but LPT shares can be sold any day of the week.
However it is better not to disturb your investment if you don’t have to, so you should normally hold some cash handy for at least smaller emergencies.
For global property diversification, a small allocation to the DFA Global Real Estate fund fits in well - spread across about 240 LPT’s around the world.
Beware - too many fishhooks and better left alone unless you are a commercial property expert.
Commercial property fits well into a diversified portfolio of bonds, property and shares.
LPT’s will give you a good income yield – the rent.
Unless you have a very large amount of money, you are better to invest in LPT’s as they will give you diversification across the different property types, and all over NZ and the globe.
You will also have liquidity or access to cash, as listed property shares are bought and sold daily on most sharemarkets
Do not try and pick the “right” fund – study after study indicates that stock picking is a futile exercise in the long run.