Mixed-use properties are booming! Residential investor numbers plunge as this property type becomes an investment hotspot!

Introducing ‘Lixing's property picks’

The long-awaited launch is here! YIJU's ‘Lixing's property picks’ column, which has been in planning for some time, finally meets its readers. This property-viewing and investment column is a project we have put our hearts into this year. We are honoured to welcome Liang Lixing, his Chinese name, to our team, bringing nearly 20 years of property investment experience in New Zealand. ‘Lixing's property picks’ aims to help everyone with a passion for property investment, as well as first-home buyers making their first purchase. Each week, we will share a timely selection of properties we consider most worth buying, hoping to make a modest contribution to your investment journey.

YIJU New Zealand

Who is Lixing?

Hello everyone,

I'm Liang Lixing, also known by my English name, Bernard Leung! It is a pleasure to meet you here. In 2001, aged 21, I bought my first property in New Zealand and have been active in the property market for nearly 20 years since. I am a property investment enthusiast and manage residential and commercial properties. My guiding belief is that ‘success and good fortune come to those who persistently seek opportunities’. I hope ‘Lixing's property picks’ will bring you more practical information on property investment.

 

Government lands three heavy blows on residential investment as investor numbers plunge! 

From 1 May, banks will raise the deposit requirement for investment properties under LVR restrictions to 40%. Last month, the Government announced a ten-year extension to the bright-line test and the removal of interest deductibility, delivering the toughest three-pronged blow ever to the residential market. Data show that commercial property has entered a fresh growth phase since 3–April, with transaction volumes continuing to rise, particularly in areas with strong development potential.

Industry figures say the Government's crackdown on residential investment has driven strong growth in commercial property transactions. Many buyers have lost faith in the heavily regulated residential market. Many investors say residential capital growth is levelling off, while commercial property is becoming a market focus as the global economy recovers. 

The CEO of Universal Homes said: ‘We are seeing a substantial decline in residential investors. First-home buyers now account for as much as 90% of buyers, while investors account for just 10%.’ 

As residential investors' market share shrinks sharply, where will investment funds flow? Reserve Bank data show that, since the year 2019, month 8, outflows from New Zealand bank term deposits have reached 21,700,000,000 New Zealand dollars. These funds are urgently seeking viable investment returns, and interest in commercial and industrial property has increased considerably, both in Auckland and elsewhere. 

People are diversifying their investment portfolios. Increasing numbers of traditional investors are no longer content with residential assets alone and are gradually shifting towards commercial investment. Mixed residential and commercial properties have become significantly more popular with investors and owner-occupiers.

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Why are mixed-use properties becoming the market's new favourites?

Favourable policy settings 

According to interest.co.nz, the Government's changes to residential property taxation leave mixed residential and commercial properties in limbo. This also means the newly announced tax policies have yet to bring mixed-use properties within their regulatory scope. 

Under the new tax policies, residential investors will no longer be able to deduct interest for tax purposes, and gains on residential properties bought by investors and sold within 10 years will be taxed, except for new builds. The Government says the new rules do not apply to commercial investment properties such as shops, offices, warehouses and factories. These will not be subject to the bright-line timeframe, and their owners will still be able to deduct interest.

Changing living arrangements 

Data from Barfoot show that, since the start of 2021, the pandemic has encouraged new ways of working from home. More people are choosing to work from home, suburban property transactions are rising steadily, and mixed-use properties are experiencing strong growth. On the fringes of urban centres, older shops often incorporate apartments. In the CBD, apartments can also combine office space with living quarters. In the post-pandemic era, changing lifestyles and the scarcity of central-city land are encouraging more buyers to favour mixed residential and commercial properties. 

Higher investment yields 

Ingham of Ray White said: ‘Commercial properties offer investors many attractions, including high yields, net leases under which tenants cover most outgoings, longer lease terms and the option of living on site. These factors are making commercial property the clear choice for investors today. As traditional residential investors diversify, agencies are increasingly providing services across property sectors, and residential investors are becoming more interested in mixed-use properties.’ 

‘Several of the company's recent mixed-use listings sold at high prices after successive bids from buyers as soon as they came onto the market. These included several mixed-use properties in Ponsonby, which sold after strong enquiry and repeated offers. Buyer interest in mixed-use properties is very high. Whether used for owner-occupation, working from home or loft-style living with a commercial component, these properties can be leased for business use, providing investors with a valuable income stream,’ Ingham said.

Business mixed-use zones are typically located around city centres and along public transport corridors, combining residential areas with commercial and city-centre uses. The property at 89 College Hill, Freemans Bay, Auckland is a perfect example of mixed residential and commercial use.

In 2006, I lived at 47 Jervois Road for more than 2 years. At the time, I held 3 different jobs and worked around 7 days a week. Every day, I ran along College Hill to the gym in the city, and the villa at 89 College Hill always caught my eye. A high-end jewellery shop occupied the villa then. Its luxurious interior, tidy exterior, Victorian architecture and well-kept garden made the house look splendid, imposing and very appealing. (This paragraph could be omitted, but Lixing wrote it, so everyone's views need to be respected.) 

Reason to recommend 1: Convenient transport links and a location between two centres

This commercial property adjoins the rapidly developing Ponsonby centre, is close to State Highways 1 and 16, and sits opposite Ponsonby Countdown. Nearby are the well-known Vinegar Lane apartments, while other upmarket apartment developments such as The Greenhouse are under construction, bringing substantial population growth to the area.
 
This centrally located Freemans Bay villa enjoys high visibility. It is in a Mixed Use zone, a versatile development area currently popular with investors. It also has sea views and is less than ten minutes' drive from the waterfront.

 Highlights: 1. Between two centres; 2. Mixed Use zoning; 3. Attractive views

Reason to recommend 2: Well-established amenities

The property has 612 square metres of freehold land and a total floor area of approximately 307 square metres over two storeys, along with 7 car parks. It is close to New World supermarket, Three Lamps in Ponsonby and Jervois Road, with well-known eateries and shopping facilities nearby. Ponsonby Road offers many renowned restaurants, cafés, galleries, upmarket shops and nightclubs. This location offers strong potential for capital appreciation, whether for owner-occupation or investment. 

Reason to recommend 3: A versatile development zone

Investors can add value through commercial leasing, office use, retail and other activities. The property is in a mixed residential and commercial zone comprising apartment buildings, historic villas, offices, retail businesses and small-scale industrial uses. Such versatile areas are currently popular with investors. Notably, this mixed-use zone permits development up to 13 metres high, allowing approximately 4–5 storeys.

Reason to recommend 4: Net yield 

Net yield is a major attraction of this property. In New Zealand, commercial tenants typically cover repairs, maintenance, taxes, utilities, insurance and other outgoings. For investors, this type of property therefore offers higher net returns.

Reason to recommend 5: Versatile property uses

The property is an excellent choice for land banking and future development because it is in the most flexible development zone. Investors can generate cash flow through leasing, retail or office use.

Owner-occupiers and commercial investors may have completely different reasons for buying. If you are purchasing this property as an investor, its yield will probably be a priority. Risk factors you also need to consider include:

1. Vacancy periods, including holidays

2. Tenant quality, if the property is tenanted

3. Stability of rental income

 

Commercial property categories:

Residential properties have three basic forms: standalone houses, townhouses and apartments. Commercial property, by contrast, has nearly 20 different forms, broadly grouped into the following three categories.

• Offices

Office properties range from multi-storey CBD towers to single-storey suburban office buildings. They are usually classified as ‘prime’ or ‘secondary’ according to their location. 

2. Retail

This covers everything from large shopping centres to individual shops. Retail locations are generally classified as centres, subregional centres, CBD centres, neighbourhood centres and bulk goods centres.

3. Industrial

This category can include factories, warehouses and parks. Like offices, these are usually classified as ‘prime’ or ‘secondary’, depending on their size and location. 

Whether buying for your own use or as an investment, the key consideration in commercial property is yield. It is also the term you will hear most often when discussing commercial property and the fundamental measure of any commercial property investment.

 

Commercial property: how to calculate yield

Usually, annual income, meaning rent excluding operating costs, ÷ property value = yield 

For example, suppose this property generates annual rent of NZ$70,000, and records show the owner bought it for NZ$1,000,000. Using the formula above, its yield is 7% (7 ÷ 100).

Conclusion:

Remember that if your property is vacant for a period, for example over Christmas, during student holidays or for other specific reasons, you need to consider its holding costs. Rent is crucial to commercial property because it can generate strong cash flow, especially if you plan to use that income to help meet your mortgage payments.

Whether you are an owner-occupier or an investor, you want the property you buy to appreciate over the long term. Capital growth rates will vary by sector, year and location, depending on the economic conditions at the time.