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 (LVR’s) have seen an increase in investors seeking commercial properties.
In recent years returns on residential property have been around 2% to 3% (excluding capital gains) while commercial returns have been around 4% to 8%.
Commercial property also has a tax advantage because commercial owners can depreciate buildings, fixtures and fitting but residential investors cannot.
Commercial loans carry a typical maximum LVR of 65%, meaning borrowers usually require a 35% deposit. These can be achieved via cash or utilising equity in other residential or commercial property.
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 portion of the property
- Direct purchase by an individual or their company or trust of a property
- Limited Partnerships
One option is buying shares of property companies listed on the NZX. This offers diversity of assets plus geographical spread.
Because the shares are listed on the NZX they are easily saleable and investors can sell all or part of their shareholdings and get their funds returned within a few days.
Property syndicates are another popular form of commercial investment, often with higher returns because of the way they are structured. The syndicate usually borrows a portion of the purchase price and because bank interest rates are currently very low it lifts the yield for investors.
Syndications generally offer returns one or two percent higher than listed company shares and considerably more than current bank term deposits.
Property syndications commonly offer parcels of units or shares of between $10,000 to $100,000 each for an ownership share in a commercial property. There are establishment fees which are outlined in the investment statements.
Syndication properties can vary from supermarkets to standalone retail, industrial and office properties.
According to Bayleys property, researchers, syndicates accounted for roughly eight percent of market sales in 2019. Over the 10 years between 2009 to 2019 it is estimated that syndicates have accumulated $2.4 billion worth of commercial property.
Historically investment in syndication units have been harder to cash up than shares, although syndicate managers often facilitate the exchange of units.
There is also a trading platform called Syndex (www.syndex.exchange) which lists syndication units available to buyers.
It is important to find out if any of the people or firms doing work for the syndicate are related to each other in any way. For example, is the maintenance company related to the company setting up the syndicate? If so, how will their charges be calculated and will they act in your best interest or try to maximise their fees.
Investors should also check the management fees and who they are paid to, can they rise, can syndicate owners change the manager and any associated fees? Significantly, is anyone allowed to borrow money from the syndicate?
BUY YOUR OWN BUILDING
Investors can also buy their own building and this can be structured as individual, a company or a trust.
Over the past 10 years total returns from commercial have averaged 10 percent.
The value of a commercial property is dependent on the quality of the tenant and the term of the lease. The longer the lease the better quality the tenant the more desirable the property is.
Properties with a quality tenant such as a government or a bank sell for a premium at auction.
Of course if you are reliant on only one tenant your income is more at risk from losing your tenant.
When tenants stopped paying their rent during the COVID lockdown a lot of landlords had to talk to their bank about extending loan facilities.
This is where two or more partners jointly invest. Each partner pays their own tax on their income from the limited partnership and this works well if partners have differing tax circumstances.
Limited partnerships are more complex than other forms of investment and need to be administered with legal and accounting expertise.
Every limited partnership must have a partnership agreement between partners that governs the terms and conditions of the partnership relationship.
They are registered at the Companies Office and need to file an Annual Return.
Sumpter Baughen manage several Limited Partnerships. If you need more information about them please give us a call.
Sometimes commercial properties can be difficult to manage for a variety of reasons such as council requirements or complying with government legislation. Sumpter Baughen assist a number of our clients to manage their commercial properties.
If you think we could help manage your commercial property don’t hesitate to give us a call.