The worst and best property investments

By ANNE GIBSON

People often ask where the property market is moving, but if predicting the future was easy we wouldn't need investment advisers.

However, we can at least analyse the most up-to-date information available. This week the Property Council released figures about the health of large property investments nationally.

Excluding the housing market, the council examined the health of the three largest investment property sectors - office blocks, retail and industrial.

The first three months of the year produced mixed results.

The quarter to March 31 showed that the single worst performer in terms of total returns was Auckland CBD office property. It generated a return - rental income plus capital growth - of only 1.36 per cent in the quarter, equivalent to 5.4 per cent a year. So a $10 million office block would generate capital growth and rental of $540,000 gross.

With savings rates now at around 6 per cent, that $10 million could be better off in the bank. There, it would give you $600,00 gross.

All other sectors returned more than Auckland CBD office blocks in terms of capital growth and rental income, such as Christchurch industrial (2.71 per cent) and Wellington CBD offices (1.42 per cent).

"But you're taking the single worst performer," said Nicole Humphries, of the Property Council's research department. "No one invests only in Auckland CBD office blocks.

"Property is experiencing a low at the moment and is at the bottom of its cycle, so we're looking at worst-case scenarios in terms of returns. As an economy generally, we've been in better places. If the New Zealand economy is doing poorly, then property does poorly."

So when might that change?

"I don't know that anyone would be brave enough to forecast a turnaround," she said.

Although Auckland CBD offices are performing like dogs, shopping centres are angels in comparison, with Humphries citing spectacular returns from large retail investments.

The Property Council defines a retail investment as a centre with more than 4000 sq m in it, equivalent to a $20 million-plus investment like the Two Double Five shopping centre in Newmarket's Broadway or the Sunnynook shopping centre on Auckland's North Shore.

The single best performer on the latest Property Council investment performance index is retail investment, which generated a 3.74 per cent return in the quarter, equivalent to an annual return of 14.96 per cent.

So our $10 million investment would return nearly $1.5 million annually and much of that in cold, hard cash. But keep in mind that income returns from property are high, while capital returns are relatively low. Put more simply, rent is the big money spinner in property these days. Our low inflation economy means you can pretty much forget about that shopping centre going sky-high with revaluations.

Of that $1.5 million annual return, $900,000 would be from rent and the rest would be a paper gain, until it came time for you to sell the shopping centre.

All this explains why investors like Westfield and AMP are building new regional and suburban shopping centres, cashing in on the lucrative business.

The Property Council showed the best income returns came from Wellington CBD office blocks (2.74 per cent quarterly income), followed by industrial nationwide (2.54 per cent quarterly).

Links


Property.co.nz