Investment Property Snapshot: Commercial properties are available at similar prices to residential properties, but the returns are usually higher

Investment Property Snapshot: Commercial properties are available at similar prices to residential properties, but the returns are usually higher
This retail premises at 14 Chews Lane in Wellington's CBD sold for $715,000.

 Investment Property Snapshot
What: Commercial properties in Auckland and Wellington
Where: Albany & Wellington CBD
Prices: $734,500 & $715,000
Net rental yields: 6.13% and 6.82%

Commercial property remains a viable alternative to residential property investments, with some commercial properties selling at prices that are comparable with many residential properties, although the commercial units generally provide better rental returns than their residential counterparts.

The latest commercial sales results reported by Bayleys Real Estate included a retail premises located at 14 Chews Lane in Wellington's CBD which sold for $715,000, and an office unit at Albany on Auckland's North Shore that fetched $734,500.

The Chews Lane property (upper images at right) was a 50 square metre corner unit that was leased to a food outlet operator for $48,823 (plus GST) a year, with 3% annual rent increases with the additional benefit of a personal guarantee.

Commercial properties have an advantage over residential properties in that outgoings such as rates and insurance are generally paid by the tenant, whereas with residential properties these are usually the responsibility of the landlord.

That meant the rent on the Chews Lane property provided its new owner with a net rental yield of 6.82%.

The sale was handled by Bayleys agent James Higgie who said there was good interest in the property from novice commercial property investors, several of whom already owned residential property portfolios but were looking to diversify into commercial.

They were attracted by the property's affordable price, its good location, the fact it had a 100% NBS seismic rating, and was an uncomplicated property with a single tenant.

Affordable commercial alternatives to residential investment properties can also be found in Auckland, where Bayleys recently sold a 155 square metre office unit in the Albany commercial precinct on the North Shore (lower images at right).

The property came with five on-site car parks and was rented at $45,000 (plus GST) a year plus outgoings, which would have provided the new owner with a net rental yield of 6.13%.

However Tonia Robertson, the Bayleys agent who marketed the property with her colleague Caroline McNaught, said the tenant's lease expired during the marketing campaign, although the tenant was prepared to renew the lease at a higher rent for another three years.

But that meant the property was of interest to owner-occupiers as well as investors, and although a mix of experienced and novice investors were interested in the property, in the end it was bought by a couple as premises for their own business.

This was also their first commercial property investment.

Details of these and other commercial properties which have recently sold are available on our Commercial Property Sales page.

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They are a lot harder to lend against though, Harder to find a tenant in a downturn, and banks have to hold a lot more capital against your loan. Going into a recession you need to have a decent portfolio already imho to add to this asset class.

Also banks want Sophisticated investors in this space, not mum and dad losing family home etc.....

Every "sophisticated investor" started out as a novice buying their first commercial property. Everyone has to start somewhere. But debt levels are usually lower for commercial compared to residential, although LVR restrictions on residential would have narrowed that gap.

Completely agree but since the royal commission, it seems banks don't want to tutor Ma and Pa towards sophistication. Its obvious from the better returns available that their is both less access to this class and more risk (as well as higher funding costs).

Yes Greg, I agree with you that raw yields for commercial properties have always tended to be more attractive compared to residential.
However, your comments above are based on a fairly narrow view of commercial property investment; what you don't point out is that a novice should take a lot of care in that while the returns may be higher so too are the risks.
Over one in five small businesses fail in their first year (I have heard as high as 30%) meaning the landlord is most likely going to be owed money, have difficulty in recovering rent owed especially if it is a bankrupted limited liability company, and there is the considerably greater time and effort in sorting out the lease and finding a new tenant compared to that of a residential landlord. A commercial property landlord is going to need far, far deeper pockets than a residential landlord to weather considerable periods of no return (with continuing mortgage and other outgoing commitments). Prospective commercial investors are well advised to look around retail and industrial areas and note how long it takes to lease properties and ask themselves could they go that long without income.
Also the commercial landlord needs to be well aware of the changing nature of the demand for commercial properties. The number of empty and seemingly abandoned suburban shops is a prime example of this.
So, yes the returns may be higher, but so to are the risks. It is for this reason that banks are more conservative - and often charging a higher rate - in their lending on commercial properties. While many leverage against the family home to invest in residential property, care should be taken in considering doing this for commercial property.
Having said all that; the positive of commercial properties is that one is unlikely to have the difficulties of partying tenants disturbing the neighbours and trashing the property.

"So, yes the returns may be higher, but so to are the risks"

The changing market environment in the residential property market in Auckland over the last 2 years or so, has resulted in a move by some residential property investors into commercial property. As a result, some prices on commercial properties are being bid up so much that the returns are actually lower than residential property. And remember that commercial property is less liquid than the residential property market.

Take the following recent commercial property transaction as an example (which is a lower return than for some residential property in Auckland).

393 Remuera Rd: Remuera - Outcome: sold for $2.275 million at a 3.52% yield

Say you have your home and 2 rentals all debt free and about $700K cash. Would you invest into commercial with atleast 7% or buy more residential to increase net worth?

Banks fall over themselves to lend on commercial properties because of the much higher yields.
65% LVR is common for reasonably good security. Vacancies are rarely a problem if investors realise that we live in NZ, and not London or New York and buy investments suitable for the size of our local economy.
Long term vacancies mean either a lazy agent, a lazy owner or a property that is was a dog from day one. Commercial is totally different from residential.

Kia kaha Christchurch and Muslim community.
New to commercial from residential in last 3 years. Enjoy it, learnt heaps and made some dough. We have a leasing agent and property manager, who both know what's what. An advantage, commercial is exempt from the extended brightline test, which at five years is a long time if you suddenly feel you have to sell.

Saying Commercial is exempt from Capital gains tax is a broad statement, from financial advise I have been given regarding Commercial property in the past, Id be having a wee check on that, dependant on your intention, if its your business etc etc...

No best you go and reread what was written. I referred to the extended brightline test. Perhaps you do not know what that is

Kia kaha Christchurch and Muslim community.
New to commercial from residential in last 3 years. Enjoy it, learnt heaps and made some dough. We have a leasing agent and property manager, who both know what's what. An advantage, commercial is exempt from the extended brightline test, which at five years is a long time if you suddenly feel you have to sell.

Commercial is the same as all other investment vehicles, it has its pros & cons. Bigger numbers, bigger wins bigger losses.... I own commercial, and I just look out my office window to keep myself grounded. The commercial property across the road sold Nov 2007 for $2 mil (CV 1.36), 6 years later May 2013 sold for $1.3 mil (CV 1.34). 700K capital burnt over 6 years (not counting all the other loss aspects, int, loss on use of money etc), probably about the same loss to time ratio as buying a new Audi. That's a prime Penrose location too & Kiwi businesses that owned it, not foreign investors. I wonder if this time will be the same or different.....

Apart from any other factors like whether the property was leased or vacant, most properties took a hit in that time period, commercial was not immune to the GFC

Houseworks, I recall the many rebuttals you hurled at me over CGT on property, especially IRD's intention provision. You repeatedly insisted property was exempt from CGT. I hope for your own sake you've carefully studied the relevant subject material on the IRD website.

From the Inland Revenue Department "4. What types of property does this rule apply to? The bright-line rule only applies to residential property" That's pretty clear and understandable unless you're Retired Poppy, the Bright Line test does not apply to commercial property and rural.

While on the other side, a very recent sale at 14 Bowden Place Mt Wellington sold for $5.3 Million having been bought for $3.7 Million in 2007. Current CV $4.9M and all the while pushing out 5-7% net returns. Nice little earner if you can get one

Commercial is better than residential in that you don’t tend to have a turnover of tenants and all the outgoings are paid by the tenant!
The biggest problem is the amount required to buy most commercial,properties compared to residential!
We have a commercial property that we bought very well and returns us approx.15% net on purchase price awhile ago!
Yes you wouldn’t want it vacant for long periods, however if you do your homework before you buy, then you will be just fine!

I'm interested to know what residential property investors would generally consider to be the minimum yield they would consider.
4%? 5%?
Does a townhouse without much land mean you would want a higher yield (given, all things being equal, you are likely to see less capital gain on a townhouse with little land compared to a detached house on a full section).
Interested in thoughts, as I would like to understand investor mindsets better.

Well, when we bought ours we wouldn't look at anything returning less than 7% gross, 10% was ideal. I think across our portfolio at time of purchase we averaged 9%. However, the average is now around 11% based on purchase price, it could be as high as 13% but keep rents below market rates as we have long term tenants.

If we were to buy the same houses now at current prices they would return about 5% gross.

After all expenses we are returning about 3 - 4% net, excluding capital gains, which we don't factor in as we bought for future cash flow to find Mediterranean cruises and the like.

Commercial has scale that residential doesn't offer the scale commercial does - just an anecdotal account.

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