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Low interest rates and high house prices are pushing many investors to commercial properties

Property
Low interest rates and high house prices are pushing many investors to commercial properties
This shop in Te Awamutu sold for $752,000, providing a net yield of 4.8%.

Commercial properties continue to prove popular with investors in the current low interest rate environment with the net yields on Auckland commercial properties commonly dipping below 4%.

At Bayleys' main Auckland auction on June 2, 17 commercial properties were due to be offered but three were sold prior to the commencement of the auction and of the remaining 14, seven were sold under the hammer.

These included a 926 square metre warehouse on an 1112 square metre site in Onehunga.

It was providing net rent of $132,600 plus GST a year and sold for $3.49 million, providing its new owners with a net yield of 3.79%.

Under most commercial leases the tenant usually pays outgoings such and rates and insurance, giving the landlord a net return which is more easily comparable with other types of investments, unlike residential tenancies where the landlord usually pays the outgoings and the yield is gross.

Smaller retail properties remain popular with mum and dad investors and there was very strong bidding for a newish (2014) 150 square metre shop at Henderson in west Auckland that was leased to a cafe operator, providing net rent $46,000 a year.

It sold for $1,122,000 giving its new owner a net yield of 4.09%.

Things have also been busy at the commercial auctions around the rest of the country, although outside of Auckland the yields tend to be a bit higher with desirable properties often achieving yields in the  4% to 5% range.

Last week Bayleys sold a 197 square metre retail premises in Te Awamutu for $752,000 which provided a 4.8% yield, while a brand new, 829 square metre warehouse on a 1500 square site at Trentham in Upper Hutt went for $2.625 million, giving a net yield of 4.53%.

In Christchurch a 112 square metre shop at Ferrymead fetched $801,000, giving a net yield of 4.99%.

With house prices being so high, investors are often to buy a smaller commercial property for a lower price than a residential rental and get a better return, although they need to be prepared for the possibility of an extended period of vacancy if they lose a tenant from a commercial property.

Details of all of the individual commercial sales recorded by interest.co.nz are available on our Commercial Property Sales page.

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5 Comments

Thanks Greg, there is also the not negligible fact that commercial property is neither subject to the brightline test nor the end of interest tax deductibility which "pushes investors into commercial property"

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Run down cheap to rent commercial space coming to a location near you soon. If Mum and Dad "investors" are seemingly dipping their toe in the commercial water, I'd be surprised if they've done the due diligence on ongoing fit-out and maintenance costs. As far as property investment goes, commercial is to residential, as peanut butter is to public transport.

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Savvy business owners who have clever lawyers will be able to take advantage of these greenhorns. Hiring the right firm and spending a bit more on contract fees could translate to a binding agreement working heavily in the tenants favour.

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Commercial property can be quite tricky but also very rewarding. And a 4% net return is still a good return, for something that has much less risk of depreciating in the future than the residential housing Ponzi. However one-off maintenance costs can be a surprise. and not a good one. Due diligence is very important. And not all properties and locations always ensure a constant flow of tenancies.

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Pre Covid, I could see the benefits of commercial property. These days most of it is in the ten foot pole category.
Now there is less commercial activity requiring premises. Unless of course it's a motel!

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