Olly Newland says only invest in residential property if you don't mind low returns and all the hassles, consider commercial property as an alternative

Veteran property investor and commentator Olly Newland believes the Auckland residential property market could have hit a plateau that could last for 10 years.

“I don’t think the bubble has burst. I would say it’s leaking and has become a little bit soft around the edges,” said Newland, who is a director of property management and advisory company Newland Burling & Co.

“The Auckland market is choppy, it’s nowhere near as buoyant as it was a year or two ago,” he said.

“There’s still money to be made and people can still sell their places, but I think we’ve probably reached the pinnacle at the moment.

“I think we’re going into a long flat period which could last for 10 years.”

Provided we don’t suffer some massive unforeseen economic shock like another international financial crisis, he said.

Newland also believes that provincial property markets, which have remained buoyant while the Auckland market has flattened, will eventually follow Auckland’s lead.

"There’s what I call a grunt factor, where prices reach a point where it doesn’t matter how cheap interest rates are, the rental [income] just doesn’t cover it,” he said.

“I think many areas are reaching that grunt factor and people are just going into it for the capital gain.

If that capital gain starts to slow down, where it has here and there, then the people who have been buying will start to think twice about whether they should carry on.”

Oversupply issues to emerge?

Newland believes this poses particular risks for the building trade, with builders likely to have large numbers of projects on the go which they started when demand was high, only to be left high and dry if demand falls away suddenly.

That could lead to an oversupply of apartments and other housing projects, as has happened in parts of Australia.

“This may be a few years down the line, but we have to watch it,” he said.

He also believes residential property investment now only makes sense for investors if they don’t mind low returns.

“If you are happy to invest $1 million or whatever it is and are happy to get, effectively, a 1.5% to 2% return on your money, with all of the hassle of tenants and that sort of thing, then it’s probably as good as any other,” he said.

“At least it’s bricks and mortar and you can see where it is and it’s in your control.

“But as a return on your investment, it’s pretty lousy.”

Small commercial properties now cost less than an average Auckland house

Newland said many of his clients were starting to invest in commercial property because the returns were better and a smaller commercial property now costs less than an average Auckland house.

“We have clients who are buying commercial properties for $200,000 to $250,000 [which are] producing returns of 6-7% net in the hand after all expenses, because the tenant usually pays all the outgoings,” he said.

“There’s no Tenancy Tribunal, no bond limitations, there’s no LVR rules, no bright line test, eviction is much easier, the tenants look after the interior, they are there for years and years usually,” he said.

But he also cautioned that commercial property could be a trap for the unwary.

“You should not just go down the road and buy one, because there’s lots of fish hooks in commercial property and if you are not careful you could take a real bath,” he said.

“You have to understand what you are getting into, whether it’s a $25 million one or a $250,000 one.

“It’s not that difficult if you are prepared to learn about it,” he said.

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46 Comments

Not too sure Olly where these $200 to $250k commercial properties are?
What sort of property and where are they?
Certainly won't be any reasonable area and there will be potential to have empty for awhile I would say!
With them being so cheap at $200k why wouldn't the tenant just buy it for their own occupation as it would be cheaper to own than rent!

Perhaps they feel their capital is put to better use and gets a better return investing in their business and providing employment, rather than buying property.

Agree, it is usually not a good idea for a business to own their premises; you need to be totally free to move if your business is expanding, contracting or otherwise changing or the area is no longer a good fit for your operation.
I have commercial real estate and it's certainly not without its problems at times but residential is often worse and with a lower return and no likelihood of capital gains going forward.
I look after my Mothers residential properties (she is in care) and have this morning received advise from Tenancy Services that I can now be fined if the insulation is not up to scratch. I have to sign a declaration (insulation statement) with each new tenancy and bring the house and flats up to a minimum standard. Fair enough I guess and I'm fairly sure the properties comply but you don't have so much of these sorts of things with commercial. Or 'P' houses, vandalism, rubbish etc. horror stories you hear about. Why anyone would want to deal with all that for a 2% return beggars belief, especially when the place is loosing value. I think folk tend to forget that all buildings are eventually worthless and a lot of this thirty to fifty year old junk is near the end of it's useful life.

Modern houses maybe. But old houses made from heart timber last way more than 100 yrs. A bit cold though, I must admit, but you get used to that.

True enough, we have the two oldest buildings in New Zealand here in Kerikeri. The kauri built Kemp house is coming up for 200 years and it's in lovely nick - mind you it does get a fair amount of attention lavished on it as it should. The adjacent (and younger) Stone Store has had a hell of a lot spent on it but they could both have been knocked down (worthless) if it wasn't for the historic value.
I was really thinking of the lightly built homes of more recent vintage with flimsy aluminium joinery, roofing, floor coverings, cladding, piling, kitchen, bathroom, plumbing and wiring all near failure and the end of their intended life. Unfortunately, in some places, for our young families that is all they can afford now and I am sure many will end up a nightmare for the struggling owners. $800K bulldozer fodder.

Yes. Glorified tents.

in 10 years will your retailer still be making a profit selling the latest fashion item?

I know in 10 years people will still need roofs over their heads..

Buy Palmerston North real estate, up 15%, so not as good a buy as it once was, but with population growth better than all but the golden triangle (auck, ham, tga) and similar to welly, its still my pick of the secondary cities by a big margain - anything around the 300k mark on full section will see you do very well, esp as palmy is getting its own version of the unitary plan (spots where increased density is allowed, 36sqm sleep outs etc) - can manufacture 20% yields, the cap gains are the cherry on the top. New bridge over to massey/foodHQ/AgResearch/international pacific university/Fonterra research.... etc... makes awapuni my suburb or choice for this sort of development potential right now

Yes the retail environment is in for a bit of a shakeup I guess but a lot of good commercial is not too much affected by web based shopping and none of mine is other than the possible secondary effect of an increase in available premises. The cafes, small professionals offices, hairdressers, real estate offices, light industrial, warehousing, government offices and departments and so on should be OK. You just have to do your homework and remember nothing lasts forever and try not to fall in love with your plan or place. Even Palmy.

Ah the nirvana of commercial property. As long as you get advice from Olly & Co. first of all of course.

That could lead to an oversupply of apartments and other housing projects, as has happened in parts of Australia.

Brisbane, Melbourne and Sydney have been building apartments between 3 - 6 times faster than Auckland for 7 years now, there is no chance of Auckland having an oversupply of apartments.

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There is, however, a good chance of talented Kiwi workers heading off to live more cheaply in apartments in Brisbane, Melbourne and Sydney rather than paying stupid costs in Auckland while receiving lower salaries.

It is slightly better chance than that. Brisbane has been building a lot of commercial property in its CBD, while Auckland has been building very little. Employers of professionals may leave Auckland for he lower commercial rents and more modern buildings on offer. Adding a bit of a push effect, to the pull of lower cost apartments.

http://www.theaustralian.com.au/business/property/brisbanes-commercial-p...

NZ has no economies of scale to build and has a material and land costs set by a few; The immigration boom means this is not a risk unless building go nuts for 10 years (if labour get voted in) and then immigration reverses (Ireland case, but miles off from where we currently sit).

Golden corridor for residential is now welly - palmy, new highway, workings to build it, shorter commute/freighting time between palmy and welly... this is where the next 10 years will be, aucklands done its dash I agree

Talkin to an architect who has been designing Auck apartments last 15 years. Yes there will be an oversupply in 2 years as completed projects recently started late come on stream. It's a cycle often repeated unfortunately with crappie design and construction.

Good to see someone close to the action speaking up. Although you always have to wonder with a guy like Olly as to what is in it for him. Talking his book up?

“We have clients who are buying commercial properties for $200,000 to $250,000 [which are] producing returns of 6-7% net in the hand after all expenses, because the tenant usually pays all the outgoings,” he said.

Do Newland Burling & Co have a bunch of said commercial properties about to come onto the market for sale?

Of course, time to book your expensive session with him...

Newland also believes that provincial property markets, which have remained buoyant while the Auckland market has flattened, will eventually follow Auckland’s lead.

Auckland has ploughed its own course, by deciding not to build anything, and as such sits on an independent trajectory. Auckland land prices are phenomenal and will remain so.

In the rest of the world (including latterly the rest of NZ) a more traditional property boom is happening. New housing and commercial property is being built in vast quantities. That worldwide construction boom is soon going to pose a problem to Auckland.

Renters, commercial and residential, are about to be faced with a choice. Rent in Auckland (old, dilapidated, overcrowded, expensive, antiquated, traffic choked, with a highly indebted council) or rent anywhere else (modern, spacious, inexpensive). People and jobs might just move away from Auckland.

Yes they will move out of auckland. As will many retiring baby boomers. Auckland will not grow as much as projected and that will also be a property price dampener

Yes Fritz, I also think Aucklanders will move out of Auckland especially when they think their quality of life has been compromised, and yes I also agree that the retirees should move out of Auckland if they can no longer put up with the traffic jam and long queues in everything. Things will balance out eventually.

Auckland is actually quite good if you are retired though. You don't need to drive during rush hour. The best medical facilities are close by. There are more events on. The international airport is very handy.

Yes I agree and that's why I will always be here even when I reach retirement age in 25 years time, oops, 27 now. However, I agree with Fritz because I think that there will always be a portion of the Auckland population who will leave the city for whatever reason and things will even out at the end. A win-win situation for all I hope.

There are a few places around that dissuade the young people and attract old people - Adelaide and until very recently Tauranga. The property values in those places are typically 40-50% lower and Auckland is today even more expensive than the most dynamic of cities. If this is right then Auckland property prices may fall by 70% from current relative values into the long term.

“This may be a few years down the line, but we have to watch it,” he said.

This depends on you thinking Auckland (or NZ) sits in its own pot, untroubled by the rest of the world. Supply and demand sloshing about this little city. Capital and labour waiting patiently for Auckland to slowly build up a supply of new buildings. Indeed this could take a fair few years.

However Perth has an oversupply now, Brisbane and Melbourne will have an over supply in 2018, Sydney in 2022 and Tauranga builds twice as fast as Auckland. If capital and labour decide not to be patient the deadline is much closer.

Yes. We have all made some reasonable money with capital gains but it seems that has come to an end. It's a whole different ball game with no capital gains. But still no problem doing property if you have no debt, have purchased some long time ago and now gaining a very good return on your purchase.
Anybody who is highly geared is moving into loss territory, and anybody who is on negative cashflow is in a situation that can only be described as nuts.

Given that there's $1.3b in new mortgage debt each month those with no debt or low debt are a fortunate minority. Now is a good time for people to sit tight and let time reduce the value of their debt. Those that are holding the bag on properties and are unable to sell in Auckland will certainly have a problem on their hands.

With no capital gain time will not reduce the value of your debt. It's just going to hang around your neck. It's going to have to be reducing debt by paying out from cashflow.

Our rather mild inflation will devalue the debt.

Either way if people have a cashflow problem they have a problem no matter what.

As always good market advice always comes too late ................. the commercial property market has already flown .............. and Asian buyers are in control of the cockpit .

The yields they buy at make no economic sense whatsoever , leaving me at a loss to understand why anyone would invest in something where you dont care about return .

What could the motives be , other than the find a place to store money outside the formal banks or stock-markets ?

Or away from where there is withholding tax on interest and dividends ( taxed at source ) ?

Or is it something more sinister that the AML laws ( which we seem reluctant to implement ) would expose?

We only own our home , but we have a commercial property investment and we are constantly being hounded to sell .

And the prospective buyers are ?

No guessing .

Yep, it's all about getting your money out of China still. Same as last 7-8 years.

Who cares if the return is 8% or 3%. You get to keep your money. The 'Party' can't just knock on your door, throw you into jail and keep all your money and assets.

Yeah just a guess, but I think the end March's figures for residential sales and property prices isn't going to be good. I think it's also hitting home just how much influence that Foreign Buyers (Non resident Buyers) have had on our market. If you think about it areas such as Hong Kong which have some of the most expensive property values in the world, NZ looks quite cheap by comparison. Have a listen to this recent article from BBC's World Business Report that comments on HK property prices being 1 million dollars per 500 sq feet!
http://www.bbc.co.uk/programmes/p04x30cw#play

We really need that Foreign Buyers Tax!

Why have we not considered BLOCKCHAIN as the basis for our Land and Title registry ?

This is the latest disruptive technology that is being considered by Sweden for its land transfers and settlements

And remember ........... you heard / read about it first on interest.co.nz .

Just so I dont have to remind you in a few years time

Yes I appreciate that it is often best to have your money invested in the business rather than a building.
The point I was making is if a premises could be purchased for $200k then it would be far cheaper to own than rent and the interest costs are tax deductible.
If the premises was not working then the building rented out would return more than costs, so it makes economical sense doesn't it?
Still waiting to see what type of commercial property you can buy for $200k??????

Yes fair enough and you do have the advantage of certainty of tenure as compensation for the uncertainty of value and usefulness. However with commercial returns of 6 or 7% (as per the article) and about equal to commercial loan interest costs there's it's no significant cost benefit.
I guess they are talking those small industrial units, retail shops and small stand alone offices at that price but probably wouldn't be in a flash area. Try realestate.co instead of waiting and you can report back to us all.

FYI, there are plenty of commercial property outside of Auckland for around $200k.

Any asbestos free timber buildings (i.e. easily brought up to code) on free hold land with or soon to have fibre might be worth a look.

I tend to agree with the headline that property prices might be the same in 10 years time as they are now.
That would be no bad thing.

Are these all the properties Olly is attempting to sell? ;-)

Commercial properties especially retail will be worthless in the future. People will be shopping online have their stuff delivered to their home. Retail stores will be just small show rooms and maybe warehouse, cafe and restaurants.

They've been saying this for 20 years.

Back then bank branches were all closing up.

Now they've reopened them - in fact, in many cases, built new buidlings.

The fact is, people still like dealing with other people face to face.

@Davo36
Agree. Amazon don't have a bricks and mortar distribution yet, but I hear it's coming.
Also Commercial is still warehouses/factories and the like, there will always be a need for storage/distribution/producing something locations.

hard to get your hair cut or your nails done online.

The bank will give you an online haircut if the OBR comes into play.

Well you know what; it's not just us on the downward property spiral: London House Prices Are Having Their Worst December in Years
https://www.bloomberg.com/news/articles/2016-12-12/christmas-joy-eludes-...

London’s Luxury Homes Won’t Sell, So Now They’re on Airbnb
https://www.bloomberg.com/news/articles/2017-03-26/london-mansion-owners...

“I think we’re going into a long flat period which could last for 10 years.”

That is the best case scenario for New Zealand right now. If you bought your house to live-in, don't panic. Even if the prices dip slightly or remain stagnant over the next 10 years, expect them to go up from 2027.