Property that works

The housing market has experienced its worst slump in more than 10 years and astute investors have switched their sights to commercial and industrial property.
Investors need a bigger deposit, but they have the reassurance of long-term leases and a regular rental flow. A soundly built, well-located property with strong business tenants will produce a decent return.
A recent national survey by Investment Property Databank, for the Property Council of New Zealand, showed the industrial sector was leading the way in a tentative post-recession recovery.
Vacancy rates and returns had stabilised for quality property in industrial markets. The rental falls had stopped and the correction in land values had stimulated renewed interest from investors, the survey revealed.
At present, investors are getting a better net return from commercial and industrial property than residential. A residential property investor will achieve a net return on investment anywhere between 4-8 per cent, once insurance, rates and maintenance are deducted.
Some of these costs can be included in a commercial lease paid by the tenant and the net return on a freehold property can range between 7-11 per cent, depending on location and age of the building.
Tauranga investor Evan McKain has worked the hotel and motel sector for 10 years. He believes commercial property, rather than residential, is a better proposition.
"It's a bit more costly to get into commercial because you need more equity, that's why mum-and-dad investors found it easier getting into houses," he said.
"With commercial, you have the surety of a longer-term lease worked out on business terms, and you don't have the potential problems of the Tenancy Tribunal.
"A long-term lease gives you a partnership with your tenant who shares in the upkeep and success of the property and business," said Mr McKain. "It was always a struggle for me to get my head around the tenant and property risks residential investor landlords take for their gross return."
Generally, a 40 per cent deposit is required for purchasing a commercial/industrial property. But equity of $200,000 can buy retail space, small offices and a single-operator industrial unit for less than $500,000.
Mr McKain invested in the land and building of a motel operation, and organised a 25-year lease for the business owner-operator. Rent is paid monthly and is relative to the size of the property, number of units and historic business turnover.
The tenant, who can sell the lease business at any time, is responsible for all property expenses, except structural or watertightness work.
Landlord and builder Bob Clarkson, a former Tauranga MP, is convinced more than ever that industrial is the way to go.
He told the Tauranga Property Investors Association further legislation could hinder investment in housing. He warned regulation was likely to stop people borrowing for a second home and offsetting that against other income.
"Be careful with houses. There may not be much growth for a while. If you are topping up [a rental], get rid of it. Take the loss and be done with it," said Mr Clarkson.
Houses were a great way to build a nest egg, he said, but investors should then sell out of housing and get into industrial.
"You have to have a bigger deposit to get into industrial buildings, so buy a couple of houses until you get sufficient assets to enable you to buy into industrial."
The depressed housing market at present was just part of a cycle, said Mr Clarkson. "Industrial has a better curve. Industrial keeps on rising."
Tips for  buying  commercial/industrial  property
Homework and homework: The less you know about the sector, the more you need to look.
Need for professional advice: Leases, tenancies, zoning and commercial loans can be daunting, at first.

Quality and location: The effort you put into buying the right space, whether office, retail, storage, motel, commercial building and yard, industrial complex, determines the quality of tenant and strength of lease.

Long-term view: Commercial/industrial can add important balance to your property income stream.
Source: Tauranga Property Investor