Buying residential property seems to get harder by the week. Commercial property investment is often forgotten in the race to buy a quarter acre or other residential paradise.
There are many ways to buy a small slice of commercial property, which covers retail, office, industrial, hotel/leisure, tourism and development sites.
Some investors bypass residential or advance to buy small commercial properties direct, with a mortgage. Entry-level commercial units are sometimes priced from $250,000 to $400,000 plus GST, even in Auckland, although most are in the millions. You do need to be very wary at the bottom end of issues such as leaky buildings.
Leonie Freeman, Property Council chief executive, points out that selling isn't quick if you need to get your money out. "If you decide to sell, that obviously takes time."
Another issue, says Freeman, is if your commercial tenants move out, it can be very hard to find a replacement. Freeman owned a property management company in the past and saw some small commercial property owners struggle financially when they lost tenants but still had to pay the mortgage. Most residential tenants can be replaced in a few weeks.
On the positive side, commercial tenants don't tend to phone in the middle of the night to complain that the toilet isn't working, and commercial tenants are easier to evict.
A much lower hassle investment is buy shares in listed property companies, which spread your money across multiple quality properties. The three best-known ones in New Zealand are Goodman Property Trust, Kiwi Property Group and Precinct Properties. The return comes from a mix of dividends and capital gain.
A similar option is to buy units in managed funds. Many New Zealand fund houses such as AMP, Harbour, Kernel, Milford, Mint, Pathfinder, Russell, SmartShares, Pie Funds and many others offer a variety of commercial property funds. Investors should compare the offerings or seek advice from a financial adviser.
You can invest in listed property and managed funds direct often, via financial advisers, or by investing through platforms such as Sharesies, Stake Hatch and InvestNow. By using a single platform, you reduced your administration. If you want a hassle-free life and to minimise tax, it's worth checking if your investment is a Portfolio Entity Investment (Pie).
One of the big differences between owning individual commercial properties and buying into a fund is the power of leverage. For argument's sake, if you invest $400,000 into a $1m property and borrow the remaining $600,000, you reap the capital growth on all $1m of the money, amplifying your gain. On the other side of the coin, and this is very relevant right now during the pandemic, your losses are also amplified, should the property fall in value, and you need to cash in.
Another option for commercial property investment is syndicates, such as those provided by Oyster, Jasper and others. You may be buying a small percentage of a single building or a multi-property private fund. There will generally be much higher minimum investment than with listed property or managed funds.
"The issue with syndication is if you decide you want to sell your syndicate, how do you get out of that?" says Freeman. Property syndicates can be illiquid with no secondary market, and you may have to hold on until it winds up after a set period of years.
Many of the big syndicators recognise this issue and have mechanisms so that investors in the funds can sell to others, or on a secondary market in some cases.
If you are considering buying into a syndicate do check out the Financial Markets Authority's checklist: https://tinyurl.com/FMACommercialSyndicates
Most New Zealanders will have money in commercial property by default through their KiwiSaver. For example, ANZ KiwiSaver, which has the biggest market share by membership, has listed property investments ranging from 10.36 per cent to 3.05 per cent in all of its funds, except of course the cash fund.