The worst investment in NZ
What is happening?
A lot of businesses in small towns are marginal anyway, and after rent, rates, insurances, cost of stock, ACC, wages etc. there is not much profit left for the tenant.
They often work hard themselves, put in long hours and barely make enough in wages.
As more and more people are shopping on the internet, traditional retail shops are getting hurt by the lack of foot traffic. The internet also makes it easier for self-employed people to work from home and operate mobile businesses, making the need for an office redundant. Bigger tenants like the banks will often move to more modern buildings when they become available.
Businesses like accountants and solicitors, that like to present a good profile, will move to newer more prestigious buildings to keep up appearances for their clients. When bigger retailers, like The Warehouse and Briscoes, need larger premises or move to a new shopping mall or precinct, they leave behind them vacant commercial property that often cannot be filled.
But about 80% are occupied?
A prospective commercial property buyer might at this point object and say “nonsense, 80% are occupied, and I can buy a good building with a 9 year lease for $700,000, and get a 6% to 7% yield.”
This may be good for now, but no lease runs for ever. What happens if the tenant moves on at the end of the lease, and the owner cannot get another one? Tenants go broke sometimes too.
Who wants a $700,000 investment that produces no yield, yet still has rates, insurance and maintenance to pay?
The value of commercial property lies in the quality of the tenant and the length of the lease.
A quality tenant, in a new building and a long lease creates the highest value, but no tenant, a dated building or a restricted lease, results in the building losing its value.
80% are occupied but….
Some landlords are incredibly so stubborn and so their buildings can lie empty for a long time.
Other landlords get desperate and take in a tenant at a low rental, and / or on a short lease.
In fact probably only about 60% to 70% of commercial buildings in many towns are leased on good terms for the owner.
The worst investment in NZ is risky too
I would hazard a guess that probably 15% to 30% of landlords will agree that it is. Capital is tied up and there is no yield but there are still high outgoings to pay. There is a 15% to 30% chance of no tenant for a long time, and ending up with an old empty building.
If you really are keen on property, a rental house may be better. The yield will be lower, but since a house is not purpose built and people have to live somewhere, a rental house will be lower risk.
If you really want commercial property, listed property trusts (LPTs) are a much better option, since:
· They are liquid - you can buy and sell them on the share market
· They are diversified
· They used to pay over 5% yield
· They have the money to buy the best, and so have good occupancy
But with bank rates so low, everyone is chasing yield, and so the LPT’s are expensive. Higher prices mean lower yields.
Don’t touch them;
· They often have high set up cost (the promoters is not doing it for nothing)
· Once they are set up, the promoter moves on
· Leaving you to carry the baby
· They lack diversification
· They are illiquid – hard to get cash out
· Don’t be taken in by big name tenants, they can and do move on
· Syndicates overall are quite risky
I have looked and looked and looked
I have spent 28 years looking for “the better way” to invest, but I keep coming back to the diversified portfolio; Bonds, property, and shares, on and offshore.
You can chase this and that, or have your favourites, but in the long run, the diversified portfolio may do just as well, often with less risk, and less heartache.
Unless of course you are a genius. I am not, and I have not met many.
Supplied by Alan Clarke, AFA 26532, financial & retirement adviser, & author.
His second book “The Great NZ Work, Money & Retirement Puzzle” is now available