All eyes on commercial

Bayleys’ national director commercial & industrial Ryan Johnson says the latest impetus has largely come from the recent changes to interest deductibility on residential investment property, the extension of the bright-line test to 10 years and the reinstatement of bank loan-to-value ratios (LVRs).

But residential investors have always been tempted by the higher rental returns from commercial investment, he says.

In recent years, residential returns or yields have been around two-to-three percent (excluding recent capital gains), while commercial returns have been about four-to-eight percent.

Johnson says the current level of enquiry on commercial property is greater than anything he has seen in his career.

“As well as the removal of interest deductibility on residential property, commercial property has an advantage when it comes to depreciation or writing-off expenses.”

Commercial owners can depreciate buildings, fixtures and fittings, but residential investors cannot.

“The other element that has changed things for residential property investors is the increased LVRs that put them more in line with commercial LVRs,” Johnson says.

LVR ratios measure how much a bank lends against a mortgaged property, compared with the value of that property. The Reserve Bank’s rationale is that borrowers with LVRs of more than 80 percent (less than a 20 percent deposit) are risking stretching their financial resources and are more vulnerable to an economic or financial shock, such as a recession or an increase in interest rates.

Commercial loans carry a typical maximum LVR of 65 percent, meaning borrowers usually require a 35 percent deposit.

Bayleys has a joint venture partnership with mortgage brokers, Vega, whose commercial loan specialists assist in helping buyers obtain finance on a case-by-case basis.

Johnson says there are different factors for commercial investors to consider when investing directly themselves, particularly the strength of tenants, type of building, location, land/zoning, lease terms, and fitouts.

However, commercial property investors have several choices about how they invest and the extent to which they need to carry out their own due diligence.

Methods of investing include:

• Buying shares in companies listed on the New Zealand stock exchange (NZX)
• Syndications where investors buy a proportion of the property
• Direct purchase by an individual or their company of a property
• Special partnerships
• Providing a loan in the form of a mortgage or debenture to an owner or developer

HANDS-OFF INVESTMENT

“One of the most ‘hands-off’ forms of commercial property investing is buying shares of property companies listed on NZX, although of course there is brokerage to pay, and managers take fees.

“One benefit of listed companies is their diversity of assets and geographical spread. Companies like Property For Industry and Goodman Property specialise in top tier industrial properties with a strong Auckland focus. Kiwi Property and Precinct Properties have more exposure to office and retail properties in Auckland and Wellington mainly.”

Another option is to invest in a fund that holds shares in listed companies, such as Forsyth Barr’s Listed Property Fund.

Property syndicates are another popular form of commercial investment, often with higher returns because of the way they are structured, Johnson says.

Syndications generally offer returns one or two percent higher than listed company shares and considerably more than current bank term deposits. Some of the most recent ones have offered returns of around five percent.

Property syndications commonly offer parcels of units or shares generally between $10,000 to $50,000 each for an ownership share in a commercial property. There are establishment fees outlined in the investment statements.

Syndication properties can vary from supermarkets to standalone retail, industrial and office properties.

There are several specialist commercial property syndication companies that have dominated the market in recent years.

They include Centuria (formerly Augusta), Oyster Property, Silverfin Capital and Erskine + Owen to name a few.

DIRECT INVESTMENT

Another form of commercial property investment is for investors to buy and own either as individuals or through an ownership company or trust set up for the purpose.

Johnson says that over the past 10 years, total returns from direct property investments have averaged 10 percent, making them attractive for retirees, superannuation funds or investors looking for an annuity style income. Investors/purchasers can range from individuals to trusts and partnerships.

A reliable tenant underpins the income streams that are typically paid monthly or quarterly, and the underlying lease terms ensure rental income is stable and locked in for a predetermined period outlined in the lease. Usually, the lease contains minimum annual increases in line with inflation, which means the property also tends to appreciate simultaneously.

“Strong demand and a stable economy have seen strong growth in commercial assets in recent years, and many direct property owners like to see the bricks and mortar they have invested in,” says Johnson.

LIMITED PARTNERSHIPS

Another form of commercial property investment is a limited partnership, which is where two or more partners jointly invest. The main advantage is that owners are typically not liable for the debts of the company. They are more complex than other forms of investment and administered with legal and accounting expertise.

New Zealand registers of limited partnerships are administered by the Ministry of Business, Innovation & Employment's Companies Office. Every limited partnership must have a partnership agreement between partners that governs the terms and conditions of the partnership relationship.

When it comes to investing in mortgages or debentures there are a number of law firms that specialise in this area. Some financial services firms also offer funds that specialise in mortgage of debenture investments and carry out most of the management on behalf of investors.

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