KEY POINTS:
Ever thought about owning the local butcher shop or cleverly converting a local house into a doctor's surgery?
For those who have dabbled in residential property, owning a own piece of commercial property can be a natural next step. For many who feel they have already have enough
equity in the residential market, there is the reassurance of no link between the commercial and residential markets.
Although it could be argued that both the commercial and residential property markets are near the peak of their cycles, property experts say this is just coincidence. The conventional wisdom is that the commercial property cycle does not mirror the residential cycle.
Connal Townsend, chief executive of the Property Council of New Zealand says: "The two are completely unrelated. At the end of the day commercial property is a completely separate industry, which is not affected by the residential ups and downs.
"Commercial property is driven hugely by the Australian superannuation funds, which continue to pump money into New Zealand because they can do twice as well here (with no stamp duty)."
"They are not linked, except both cycles are confidence based," explains Peter Aranyi, director of training centre Empower Education and also the author of Commercial Real Estate Investor's Guide.
The two markets have different drivers, adds Derek Harries, RB Richard Ellis director.
"Commercial property is driven by tenants and leases," says Harries. "You might have a lease of three, five or 10 years which guarantees your income over the tenant of that period.
"Residential is about supply and demand and driven by interest rates. The higher the interest rates, the fewer the buyers that there are around. It is quite a different equation."
What wealth coach Martin Hawes likes about commercial property is that it is remarkably low maintenance.
"There is a no obsolescence factor," he says. "With residential you have to redo kitchens and bathrooms, now tenants will demand a dishwasher. Industrial property is four concrete walls and a tin roof. It's pretty straightforward.
"You have very good tenants or long-term tenants on long leases who pay rates, insurance rates and maintenance. In all it's fantastic."
To amateurs, the idea of owning a factory can be quite daunting and beyond their financial capability - that butcher shop could cost more than $1 million - but there are other ways. Hawes advises amateur investors to start with a property trust which has a wide exposure to all the main commercial property sectors - industrial, office, retail and bulk retail.
There is a good selection of trusts to choose from, including Macquarie Goodman, Property for Industry, Kiwi Income Property Trust (KIPT) and Guardian Property Fund.
Some of these companies have their own land banks, do their own developing and have a list of loyal international tenants.
"You don't have to manage your own property, you don't have tenant risk in a bigger vehicle," says Angus McNaughton, chief executive of the manager of KIPT, which has a $2 billion commercial portfolio, spread by sector and geography. Liquidity is another key reason investors go to KIPT, he says. People can just sell their shares in a listed trust.
The industrial part of the portfolio was the top performing with 10.5 per cent return in the past three months, says Harris.
The reason people should invest in property trusts rather than in their own small property is to benefit from the better yields the bigger players are achieving with their $20 million-plus holdings - 7 or 8 per cent versus 5 or 6 per cent, says Hawes.
"That yield is likely to go up by at least the amount of inflation so you are getting not only a good yield but income growth," says Hawes.
"It suits a lot of people in retirement. ... today people who are going to live a long time need their income to keep up with inflation. I would rather own 0.0001 per cent of something which is fantastic, rather than 100 per cent of something that is dog tucker."
Of course for the DIY kiwi investor, property trusts are highly unappealing,
"The majority of the trust managers get a percentage on the value just for breathing," says one commercial property investor. "They are a licence for getting fees."
Being a commercial landlord you will still find it easier than residential, claim the experienced players.
Retail property is commonly what people first go into. They like it, according to DTZ's Mark Calvert, because it offers most of the same features as residential and "there's a ready supply of smaller tenants which gives greater liquidity and occupancy".
And lot sizes are smaller and therefore more affordable.
Calvert has a retail property with panel beater attached in Sandringham, which offers a good bite size. With three retail tenants and the panel-beating workshop, he says it is ideal for a family trust and will yield 7.7 per cent.
Chris O'Leary, head of the commercial group at the Tauranga Property Investors Association, is looking for his first commercial property investment after years as a successful residential property investor.
"When we set up the commercial group, a lot of people who had residential property - a very high equity in residential - and they didn't want to do anything more with residential so commercial was the obvious choice."
O'Leary says that the commercial property yields are low in Tauranga - 4.5-6 per cent but the residential yields are even lower, 5-6 per cent.
The yields for residential investors are gross while the commercial yields are net.
He has friends who own commercial property and some who have sold out recently for what they view as being "unbelievable" prices, so he is extremely wary.
"I'm looking for something that will give me a cashflow return and I have been told that's incredibly hard," says O'Leary.
Ideally he would like to buy an industrial investment. He says: "It's easier for me to manage and it's reasonably stable."
Harries advises people such as O'Leary to start off in partnership with someone or start off small and get into something bigger.
"A large number of properties are done off-market," says Harries.
"If you are new it's important you get in front of guys and try and develop a relationship with them.
"When these properties come on the market they are often gone in a couple of phone calls."
