Thinking of investing in commercial property?

Posted on 7 October 2015 by Peter Hill

Peter Hill - BCom FCA

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• Whangarei
• 09 438 3939 Ext. 828
• 027 543 1104
• peterh@sumpters.co.nz
• Linkedin

Peter became a director of Sumpter Baughen in 2012. Peter is Whangarei born and bred and has been in sole practice in Whangarei since 1988 before joining Sumpter Baughen.

Peter is particularly interested in property and other forms of investment and has knowledge of investment and property markets both here and in Australia. Peter has also had some interesting corporate roles in the 24 years he has been in practice, including serving as a director on the Northland Port Corporation for 16 years.  Other directorships were held during this time for Northland and Auckland Companies.In his spare time Peter runs his family farm and is a keen tennis player and fisherman.

Qualifications

• Fellow Chartered Accountant
• Bachelor of Commerce

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Ever wondered about investing in commercial property?  Are you sitting there trying to think “what’s the catch”? Sure, there’s a few things to watch out for, but investing in commercial property can be a smart move to make.

Commercial property offers an attractive alternative to investing in fixed interest, shares or residential properties.  Generally, the rental return on commercial properties is substantially higher than the rental return for residential properties.

The Review Process

Just like any investment or purchase you need to do a review.

You want to make sure all the boxes are ticked before you invest.  Always seek professional advice on how your commercial property works and what returns you can expect.

Check the lease

Most commercial properties are valued according to the quality of the tenant, the length of lease still to run and the rate of return on the investment.

It is important to read and understand the lease.

Some of the items to check include:

• The lease term.  How much longer has the lease got to run?
• Who pays the outgoings?  This includes expenses such as rates and insurance
• Are there any rights of renewal and when are these exercisable?
• What provisions are in the lease for rent review and when are these due?

Having a regular review process in place will consistently increase your profits.  With professional advice, you will have first hand information available on what rents you should be charging and how and when to increase.

Earthquake Requirements

Although Councils may have reduced their earthquake rating requirements, some tenants such as Government Departments still require higher earthquake ratings than the council regulations.

If an investor intends to borrow to help fund the purchase, then it’s important to check what the minimum earthquake rating the bank may require.

The government did a review following the Christchurch earthquakes and their minimum seismic rating was set at 34%.  The reason for this is that no one was killed in the Christchurch earthquakes in a building with a seismic rating of 34% or above.  However, if you are prepared to upgrade a commercial property above that you may be attracting tenants who are prepared to invest in a decent and longer lease.

If the building needs to be upgraded to satisfy the earthquake requirements, then the cost of this needs to be factored into the purchase price.

Council Requirements

When a commercial property owner applies for a building consent this usually triggers requirement to upgrade the building to meet the latest council building requirements.  This may include expensive alterations to meet new fire and safety regulations. It is a good idea to obtain a building report before purchasing a commercial building.

It is the responsibility of the owner of the commercial property to ensure that evacuation procedures are in place.  The leaseholders as occupants have to make sure these procedures are followed, but they have to be put in place by the owner.

Treat property investment like you would any business.  Your attitude will normally dictate how the tenancy will run and getting it right with all parties from the start will make landlord life a lot smoother.

Freehold versus Body Corporate

Some buildings are unit titled and part of a Body Corporate.  If the building is part of a Body Corporate, it’s important to ask for the latest Body Corporate Financial Statements. We would recommend asking for a copy of the latest Body Corporate minutes to check what future commitments there are and what annual levies are payable.

It’s a smart idea to get someone else to look over the finer detail so nothing is missed. No matter which way you go, you want to know what today and tomorrow holds with regards to rental potential and future outgoings.

Freehold versus Leasehold

Some commercial properties are leasehold, which means another party owns the freehold.  This means the building owner will be charged an annual ground rent by the owner of the freehold land. Before purchasing such a building, it is important to review the terms of the ground lease for years still to run, annual rent and review dates.

If you are going down the leasehold route it pays to understand your commitments because even if the tenant vacates you will be still liable to pay the ground lease.   At the end of the day, both parties want to see a return on their investment.

We have only covered a few factors to consider when thinking of investing in a commercial property. For sound advice to keep your investment safe and profitable, give us a call and we’ll help you get it sorted.