4 facts to help with your first commercial property investment

At the end of 2017 there was over 1.35 million square metres of commercial space for sale in cities around New Zealand, according to realestate.co.nz data. That's more than 135 full-sized rugby fields worth of warehouses, offices, shops, carparks, hotels, showrooms and commercial land. 

Commercial property is thriving, and all that space represents a massive opportunity for investment, for those savvy enough to take it. 

However, these types of properties often scare off newer buyers. Investing in commercial property can be seen as confusing, intimidating, risky and expensive. Plus, we don't typically have an innate understanding of how it works, like many New Zealanders do with residential property. 

To help you better understand the commercial property market, we’ve put together 4 facts you need to know to make your first commercial property investment. 

Could you invest in commercial property in New Zealand?

1. Commercial properties may be higher risk, but there are methods to overcome this

A far smaller group of people need a commercial property, or are willing to invest in one, than residential. This makes commercial investments far less liquid. That's why you need to choose wisely, to ensure that you’re not stuck with a commercial property that you can’t sell or lease. 

Commercial property is also usually riskier than residential. Most of this risk is thanks to a higher chance of vacancies, and due to it being more difficult to find suitable tenants once a vacancy does occur however there are methods for minimising and overcoming these risks. 

To lessen the chance of vacancies your best bet is to buy a property that already has a high-quality tenant in place on a long-term lease. Finding such an opportunity may take time, but it’s worth the effort to ensure long-term stability. 

That's because commercial leases are often on four year terms or longer, with the option to renew at the end of that period. That means you'll have four years or more of guaranteed income with very little risk of vacancy. You also may have two yearly rent reviews written into your lease.

 

Government, solid business, or large corporation tenants are considered 'blue chip'.

 

2. A quality lease and location is key

Another point to take into consideration to minimise your risks is the quality of the tenant. Government, solid business or large corporation tenants are considered 'blue chip' and may sign leases on a longer term. They are likely to stay put for decades, and having such a tenant in place on a quality lease can vastly increase the value of your property. 

Furthermore, you'll need to buy in a good location near infrastructure, amenities, other businesses, and transport. If the tenant leaves this will make it far easier to attract another high-quality tenant on another long-term lease.

3. A higher initial investment can lead to greater returns 

Banks in New Zealand will generally only lend 65 – 70% of the value of any commercial property due to their higher risk. That means if you want to invest in a building worth $500,000 you may have to come up with as much as $150,000.

That high cost of entry is enough to scare off most new investors, but that shouldn’t put you off. Despite the large initial costs, the rewards and benefits can make it well worth the cost if you are in a position to gather the initial investment. 

Commercial property in New Zealand offers great opportunities for those willing to take them.

4. Your tenant may cover outgoing costs and rental returns are far greater

With a residential property investment you'll have to cover property maintenance, rates, insurance, repairs and more. With a commercial property, however, your tenant will generally cover all of those costs, meaning more cash flow for you. 

What's more your rental return will be far higher with a commercial property. In fact, Morgan Stanley Capital International estimated that on average commercial property in New Zealand has a 6%, net operation income yield. A 6% return on your money is impressive no matter how you look at it. 

 

If you're about to make your start in commercial property investment make sure you start your search in the right place. New Zealand's largest online collection of property listings - realestate.co.nz.