Shop occupied by liquor retailer in Orewa sells under the hammer for $605,000, gives new owner net return of 4.96%

This 85 square metre retail premises in the coastal Auckland suburb of Orewa was taken to auction by Bayleys Real Estate on April 11.

There has been increasing interest in this type of property from novice investors who have not previously owned commercial property, because of the superior yields they can provide compared to term deposits in the current market.

Because commercial property tenants generally pay the outgoings such as rates, insurance and some maintenance costs on top of their rent, the rental yield (return) is usually net.

The property was marketed by Mustan Bagasra of Bayleys' Orewa office, who said the tenant had been operating from the premises since 2016, but prospective buyers were reassured by the fact that the tenant owned another liquor store at Albany on the North Shore, which he had operated since 2013.

Bagasra said there were about 25 potential buyers who expressed an interest in the property, and many were novice commercial property investors.

They were often weighing up whether to invest in a commercial or residential property, and one of their main concerns was that it if they lost a tenant, it would be easier to find a new one for a residential property than a commercial one.

At the auction there were four bidders for the property, three of them serious contenders and after some competitive bidding it sold under the hammer for $605,000.

It is providing net rental income of $30,000 a year, giving its new owner a net yield of 4.95%. 

In the end it was purchased by an experienced property investor who was adding to his portfolio.

Details of other commercial property sales from around the country (with photos) are available on our Commercial Property Sales page.

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25 Comments

Finally the market is coming back down to earth .

This is where yields on commercial property investments should be, considering normal risk/ reward elements such as opportunity costs of alternative investments and property- specific risk such as vacancy factors, tenant default , unexpected repair bills and interest rate risk.

The Auckland auctions of retail property had become an all-Asian affair , and one cannot but wonder as to whats really going on with buyers purchasing properties at 1% yields.

The whole thing had a bit of a smell to it , we know its not normal or sensible.

It also defies any logic , when alternative investments , even listed property , are yielding way more than 1 or 2 or 3 %

The commercial property market ( and particularly retail ) has been for too long influenced by money that is clearly not yield driven and this could be due to access to cheap funding ( from offshore for example ) or simply laundered money from Asia .

And I would assume that when you are laundering money you could not care less about yield , all you want is to legitimize the money.

If there is an alternative explanation to whats being going on , I would like to know what the reasons are .

Yields still too low IMHO.

1%? Haven't seen that.

Yes the Asians have been laundering their money here for some years now.

Your comment doesn't make sense. The lower yields means that investors are paying more and more for a given cash flow- a sign of increasing confidence and demand and greater capital gain for the vendors. The lower the yield the higher the price being offered. Not the other way round. Commercial property is on a roll with a long way still to go. No bright line capital gains test, no tenancy tribunal, no bond limitations, no dry and warm fluff, and no limits on evictions either. Anyone buying residential investment now must be nuts.

You are correct obviously in regards to commercial property being worth more the lower the yield is.
In Chch ii is expensive to build commercial since the earthquakes.
Don’t agree Big Daddy that you are nuts to be buying residential nowadays with the changes being brought in by the pathetic coalition.
There are still positive return property around, and if you are an investor rather than speculator you will hold your properties more than 5 years anyway.
Yes there are a lot of nil tenants out there, but providing you do the proper checks then you are normally pretty right.
The capital gains are still around especially in Christchurch as it is going to be the city of choice going forward.
There are great buying opportunities now and in the future providing you know what you are doing and prepared to seize them!
No better investment than property whether it be commercial or residential even with the changes providing you know what you are doing, and they are the ones who are going to benefit from this COL!

In some parts of the world, commercial property is crashing. In the US, the shopping mall is becoming; extinct; luxury retail shops in Manhattan are closing like never before; and small businesses across the country are shifting away from the "premises model" (or simply dying). In Japan, the cities and countryside are littered with neighborhood businesses that have simply "gone out of business". In their place, you have Uniqlo, Daiso, and other "low cost, high quality" goods providers.

NZ and Australia don't really think of the reasons why the above is happening. However, particularly in the case of retail, how can commercial property investment stack up when the business model of the tenants is selling high-cost goods and services to a relatively small market that is moribund by some of the highest household debt in the world?

No better investment than property......

Particularly if it's part of a manufactured asset bubble. The only problem is that if the bubble pops, the FIRE industries and govts have to frantically jury rig something to prevent it from taking down the whole economy. And that's the trade off with bubbles, they're inextricably linked to consumer spending. Take away the punch bowl and it's a scene of despair, particularly when everyone's tapped out and income growth is low or non-existent.

There are great buying opportunities now and in the future providing you know what you are doing and prepared to seize them!

Yep, soooo many opportunities! Just go along and see BigDaddy, pay his really expensive fees and he'll show them to you!

Except they won't be 'great buying opportunities', they will be market average buying opportunities which you can find for yourself if you open up TradeMe.

@big daddy I fully understand the relationship between yield and price , what I am saying is that in my view the prices being paid were simply too high ,( or the yields too low ) and that capital gain would not take care of a high -cost investment mistake .

There is no way in hell I would , or could afford to buy a off-main street shop, leased to a liquor outlet in a retirement village like Orewa for anything less than 4% nett return , unless I had a huge pile of cash or access to cheap funding .( which is only available offshore )

Now if i had secure funding from Hong Kong , Japan or Shanghai at say 2% for up to 5 years , I might have a different view about buying low yielding investments .

I like most of us ordinary Kiwis dont have access to cheap funding , but many Asians do have access to cheap funding or syndicated funding arrangements .

There is no way in hell I would , or could afford to buy a off-main street shop, leased to a liquor outlet in a retirement village like Orewa for anything less than 4% nett return

Why would you even buy at 4%? The cost of borrowing is over that.

Then buy residential and get 2% net if you are lucky.

Or just stay out of it all since it's totally overpriced.

Yep.

Excellent point. Even if its stolen money, if the financials don't stack up against the alternatives, why do it at all?

Yeah 2% net on a 20% deposit is............................................... 10%

Who said anything about retail? Retail is going though a makeover to allow for on line shopping and that's all. Offices are in huge demand as are industrial premises and they are completely different from retail. There are also many other types of commercial as well. Motels, ski lodges, hotels, or storage units, e.g. Each have their own peculiarities and advantages unique to them and different as chalk and cheese from each other.. There will always be a big demand for retail as people love to shop, to touch and feel, and besides how do you get a hair cut online, or a restaurant, or laundromat let alone any specialist services? On line stuff still has to be made somewhere, stored somewhere and distributed somewhere. At this moment millions upon millions of people in Asia are churning out more and more stuff for next to nothing, and we are being buried in that stuff. It has to be made, assembled, stored and sold somewhere.

Who said anything about retail? Retail is going though a makeover to allow for on line shopping and that's all. Offices are in huge demand as are industrial premises and they are completely different from retail. There are also many other types of commercial as well. Motels, ski lodges, hotels, or storage units, e.g. Each have their own peculiarities and advantages unique to them and different as chalk and cheese from each other.. There will always be a big demand for retail as people love to shop, to touch and feel, and besides how do you get a hair cut online, or a restaurant, or laundromat let alone any specialist services? On line stuff still has to be made somewhere, stored somewhere and distributed somewhere. At this moment millions upon millions of people in Asia are churning out more and more stuff for next to nothing, and we are being buried in that stuff. It has to be made, assembled, stored and sold somewhere.

I talked about "retail" as it's fundamental to consumer spending, which comprises 60% of GDP. Service industries that don't need "physical work" are also becoming more redundant. Now you also mention "hospitality", but we also have Airbnb (which I'm now using on business trips to Japan, S'pore, and Bangkok), but we also have ridiculously high cost structures in NZ or Australia. Something has to give.

Distribution is a no brainer, but it makes sense for the Amazons and Alibabas of the world to own and control. As they do now. Furthermore, there is no reason why distribution nodes need to be commercial property. In Japan, people often pick up deliveries at convenience stores owned by 7-11.

So if we go back to the liquor store with the ROI of approx 5%, and let's assume that it's moderate to high risk. Is it really worth the effort for a meager 5%?

Boatman: That the liquor store sold at 4.96% yield doesn't mean anything. The lease may be up for review. The rent may be too low, the next door neighbour needs the space and will pay a premium, the tenant may have already agreed to take a longer lease which drops the yield, the new owner may own others in the block. All this means that unless you have done a complete due diligence on any commercial property sale you will never know why the sale price was what is was.

Of course I dont have all the info , and the yield does look very good circa 5%.

I have a reasonable understanding of commercial property investment , I own an office building with a group of accountants, and I have investments in some NSX listed commercial property trusts and companies .

Our practice regularly undertakes due diligences for clients in the sector , and frankly , unless they have large sums of ready cash we tend to give very cautious advice on gearing levels to our clients .

Yields have gone too low in my view , particularly in suburban strip shops and retail , maybe owner -occupiers are willing to pay a premium , who knows ?

Our advice to our clients is to be very careful about over-paying for something , and dont get chased at an auction by Asian investors with a different reason for investment

your last sentence is well worth adhering to when buying any business/property/asset. i have been privy to a couple of business sales/purchases in the last year where the vendor has sought and got a 'fortune' for them and the new owner has rather quickly found themselves 'neck deep' and struggling

If the value of the property halves you will be getting nearly %10, winner.

They're building massive luxury retail in Phnom Penh. Commercial real estate. A no brainer so they say.

https://www.khmertimeskh.com/5078830/exchange-square-redefining-retail-c...

Looks like some one in NZ has a massive amount of confidence in the retail commercial sector:

http://www.sharechat.co.nz/article/1cb6027b/kiwi-property-group-gives-gr...

Wonder what they'll put in those extra 60 shops?

That mall is pretty bland I reckon. Just every chain store you can think of. Not much new or different.

I own the premises my company works out of. I don't care what the presumed ratios or return are.
Compared with the ongoing hassle of leases and renewals, including landlords desperate to jack up their return just one more percent, my life is now very easy.
Fine differences in return don't figure. For lots of us they are not the important thing.

yes - if you have a lot invested in your location of business or would find it difficult to move - owning your own building is a very attractive situation. obviously some landlords are more aggressive than others and can be difficult to have a longterm relationship with.

Very interesting comments. I shudder when I see people rushing in to buy and bland comments from "experts" saying about checking the quality of the tenants. As a small scale commercial investor / landlord I am yet to see even one commercial agent supply or for that matter even know how to do a credit check on a prospective commercial tenant. I would love to see how these experts deal with rent arrears by commercial tenants. I have done these sorts of things and know for most people evictions and debt recovery is way outside most peoples comfort zone.