Is now the best time to invest in commercial property? An experienced property adviser offers her analysis

A recent New Zealand Herald article asking ‘Have you considered investing in commercial property?’ has attracted considerable reader interest. It is easy to see why: as New Zealand house prices continue to soar, buying a residential property with a strong return seems increasingly difficult. Perhaps it is time for investors to turn their attention back to commercial property.

The article outlines various ways investors can buy small to medium-sized commercial properties, including retail premises, office buildings, industrial properties, hotels and leisure facilities, tourism properties and development land. Some investors bypass residential property and buy small commercial premises directly, obtaining mortgages to do so. Even in Auckland, it is not difficult to find entry-level commercial properties priced at NZ$250,000–400,000 plus GST, and many attract strong market interest as soon as they are launched.

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COVID-19: the impact

Restrictions on movement since last year have dealt a heavy blow to some commercial properties, affecting assets previously considered among the safest, such as prime office buildings and shopping centres. In an article on 4 October, YIJU discussed how quality commercial property has offered greater investment potential during the pandemic than many expected. With reliable tenants, leases have lasted longer than predicted during the worst of the outbreak. Despite the continuing pressure of online shopping on physical retailers and the effects of the pandemic, physical stores have not lost their role. Instead, their focus has shifted towards the consumer experience. Supply-chain problems exposed during the pandemic have also accelerated two key trends driving warehouse demand: outsourcing manufacturing capacity and moving from lean inventory management to holding larger stocks. Some property types, such as warehouses distributing online orders, have flourished ...

YIJU has noticed that although commercial property is showing clear signs of post-pandemic recovery and has promising prospects, many investors know far less about investing in it than in residential property. We therefore spoke again with experienced agent Millie Liang, who has 16 years in the commercial property industry, for an in-depth analysis of commercial property investment.

 

Liang Hong, Millie Liang

Bayleys Associate Director / Senior Commercial Property Sales Consultant

 

Q1: Thank you for speaking with YIJU. Many investors believe residential investment is becoming increasingly difficult, while now is a good time to invest in commercial property. How do you see it?

Millie Liang: Many of my clients do indeed share that view. On the one hand, many clients who own commercial property believe now is a good time to sell properties worth less than NZ$5,000,000. On the other, we have recently had more enquiries from people who have never bought commercial property. They believe it currently offers much better value than residential property. Even though banks have kept raising interest rates, this has not added much pressure for many commercial property investors, because capital gains can still cover the extra interest costs.

Let us look at the investment advantages of commercial property compared with residential property:

1. High investment returns (with potential for rapid rental growth)
2. Low ongoing maintenance costs (tenants pay council rates, agency fees, management fees and other outgoings, turning rent into pure profit)
3. Stable leases (because the lease is tied to the tenant's business, it is quite normal for a successful business to rent the same property for ten to twenty years)
4. Commercial property currently has no restrictions on overseas buyers and can be purchased without OIO approval.

Taken together, these points make it easy to understand why commercial property is attracting increasing investor attention.

 

Q2: Entry-level commercial units priced at $250,000–400,000 plus GST seem particularly popular lately. How do their short-term returns and future capital growth potential compare with traditional, higher-priced commercial properties?

Millie Liang: I have also sold these relatively new off-the-plan commercial developments for developers. Previously, when people wanted to rent a warehouse, the market did not offer standalone properties of ten to twenty square metres for long-term lease. These units are essentially small warehouses or workshops, replacing the function of a home garage or workshop. They suit business models such as those of handypersons. Let us summarise their advantages and disadvantages:

Advantages: they cost less to buy than residential property and offer flexibility for either owner occupation or rental. They are particularly suited to small, family-run New Zealand businesses with few employees, moving a home business from a residential address to a commercial one.

Disadvantages: large numbers of these commercial units are often clustered within a newly developed commercial area. Many projects are still being sold off the plans, so rental demand and capital growth potential remain to be seen. Their small sites also pose future problems for storage capacity and moving goods in and out. Functionally, these properties have significant limitations compared with traditional premises.

 

Q3: Many tenants and businesses are struggling at present. Could you summarise the changes the pandemic has brought to the retail leasing market?

Millie Liang: Because the pandemic has restricted commercial activity across many industries, commercial property has been among the first markets affected. By comparison, the pandemic has not changed the residential market's role in providing people with somewhere to live. My strongest impression is that repurposing commercial properties could become a major trend:

Hotels: we have seen the Government temporarily convert hotels in many cities into isolation facilities and accommodation for homeless people.

Office buildings: many Auckland companies have moved out of large CBD office buildings following the outbreak. People have gradually become accustomed to working from home, and even after the pandemic ends, tenants are unlikely to return quickly to lease whole buildings. After buying such properties, we could repurpose them, for example by refurbishing them as student accommodation or shared offices where employees from one or more companies work at different times. Another trend is that, rather than working online from home indefinitely, people may want a dedicated place for meetings and work. Commercial properties could therefore also be converted into live-work apartments, allowing tenants to live and work in the same place and save considerable rent.

Retail premises: we could use the front as a showroom or office and the rear for storage. Personally, I believe retail premises will still have a role after the pandemic. Given the many government restrictions, industries such as hospitality are unlikely to change their business models and will still need premises to attract customers, prepare food and sell it.

 

Q4: What advice would you give people considering investing in commercial property?

Millie Liang: I am very confident about the future of commercial property in New Zealand. Countries around the world are exploring how to stimulate and restore their economies, and the New Zealand Government is actively providing businesses with necessary support. Commercial properties that have stood vacant for so long will therefore surely make a full recovery in the later stages of the pandemic. Many investors are considering buying at low prices before the economy recovers. Prices on Auckland's Queen Street, for example, are currently extremely low, but once students and tourists return, the CBD will become the fastest-rising area. Against that backdrop, most investors are considering when to enter the market and at what price. Anyone with questions can contact me directly, and I will provide a professional analysis based on the particular property. For an office building, for example, we would consider its location and whether it is grade A, B or C. For retail premises, we would examine vacancy rates and compare the price with pre-pandemic levels.

Finally, I want to emphasise that commercial property investors need a clear understanding of their cash flow and risk management. Although we aim to achieve the highest possible capital growth, the associated risks can also be high. Managing investment risk well is what allows us to keep going over the long term.

 

Millie Liang's contact details

M：+64 21 968 128

D：+64 9 375 8440

E：millie.liang@bayleys.co.nz

If these views do not reflect your own, leave a comment below the article and join our discussion!

Disclaimer: the views above are for reference only and do not constitute guidance for specific cases. YIJU and the interviewee accept no related liability.