Surging house values make commercial property more attractive
Surging capital values have priced many residential investors out of the Auckland housing market, making commercial property an appealing and affordable alternative.
Gareth Fraser, Auckland Director of Colliers International’s Investment Sales team, says a growing number of entry level investors and family trusts are looking to invest in commercial real estate.
“In the last 12 months we’ve seen a surge in enquiry from investors who would have previously invested in residential property,” he says.
“Until recently, these investors would have considered commercial property to be out of reach, while residential property was still relatively affordable.
“However, massive capital value growth in recent years has pushed median house prices well over $1 million. By comparison, entry level commercial units can be bought for as little as $300,000.”
Fraser says that along with the lower cost of entry, investors are attracted to the competitive yields that commercial investments can offer.
“As Auckland’s residential capital values increased hugely, residential rental yields didn’t keep up, driving yields to 2-3 per cent in some cases,” he says.
“Commercial yields have also tightened, but not to the extent of residential yields, with yields on premium properties usually in the 4-5 per cent range for retail and industrial, and 6-7 per cent still achievable for offices in some locations.”
Loan to value restrictions on residential loans have also made commercial property more appealing, by bringing borrowing in line with commercial leverage in many cases.
Fraser says three commercial property sectors in particular are becoming more popular with investors:
- Commercial property syndication: This is a type of proportionate ownership in which investors own one or more shares of a property. The minimum cost per parcel is can be as low as $50,000, with returns of about 8 per cent a year.
- Unit titles: These are small retail, industrial and commercial units that form part of larger developments, such as the units for sale at 490 Pakuranga Road, Half Moon Bay, pictured above. Because they are generally smaller than standalone properties, unit titles are often affordably priced. Owners must also pay body corporate fees for the management of the complex.
- Freehold standalone properties: These are among the most sought-after investments, but are at higher values than syndications or unit titles.
Fraser says commercial property is in most cases more sophisticated than residential property. Some factors that residential investors need to consider before getting in to commercial include:
- Leases: Commercial properties are subject to leases; these lease documents are longer and more complicated, so good legal advice needs to be sought by entry level investors.
- Demand/vacancy: Leases are generally longer, but for secondary locations it can take significantly longer to re-lease than residential.
- Building integrity: The types of construction uses are often different and due diligence should be done on the building fabric and earthquake strength.
- Tenants: The strength of the tenant covenant needs to be considered and whether there are personal or bank guarantees available in the event of a default.
Market rental: The rental needs to be considered in the context of the market to ensure you are not overpaying; in the event a tenant defaults you may not be able to re-lease the premises at the same rental.
Fraser says the complexity of investing in commercial property hasn’t deterred entry level investors.
“We anticipate enquiry for affordable commercial property investments will increase with the recent slowdown in residential sales; the commercial market remains strong with attractive yields.”
Colliers International is a market leader in commercial real estate services, with more than 500 property professionals operating from 20 offices throughout New Zealand.
The Auckland Investment Sales team has a strong market presence with offices in the CBD, North Shore, West Auckland and Highbrook.