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An Overview of Commercial property investments

A commercial property investment is specifically used by an investor to generate a passive income. In New Zealand, commercial property generally takes the form of four distinct asset classes: office space, retail, industrial, and specialty.

However, there are many other subcategories such as medical, hotels, short-term accommodation and more.

 

The tenant/s generate the cash flow for your investment and thus reason for the importance of a quality tenant.


Sourcing and retaining a tenant are the most challenging aspects of managing a commercial property. A specialised commercial leasing agent will add considerable value.


Expert legal assistance from a specialised commercial property lawyer is essential, when carrying out due diligence on investments.


Risk vs yield, the higher the risk, the higher the yields, economic conditions, location, market demand and tenant strength affect the perceived risk of a commercial property investment. 


Riskier assets, such as properties located far from major cities, those with short lease terms and properties with low demand, generally yield higher returns to compensate for the increased risk.


Below is an overview of the four distinct asset classes for commercial types:


Office space


Office investments range from small < 100 sqm office units to multi-level commercial office towers. The general trend since Covid 19, has been an increased tenant demand for high quality “A” grade office space, other key aspects tenants seek are:

 

proximity to food and retail amenities, proximity to transport networks, parking for employees, natural light, well-maintained (saving repair costs since tenant’s finance these themselves), close to other similar businesses.

 

Factors such as employment growth & business confidence have an impact on the demand and risk factor and affecting the perceived yield.

 

 

Retail

 

Retail investments range from small < 100 sqm boutique hair salons to entire shopping centres.

 

Retail tenants seek high visible street front exposure from a main road.  

 

Proximity to quality key operators, an affluent location: wealthy people have more disposable incomes.

 

Additionally, investors are attracted to favourable zoning options for multi-tenant options and potential future developments.

 

The market drivers in the retail sector can include consumer confidence, interest rates, time of year.

 

Industrial

 

Industrial investment properties range in size, and in their potential uses. Industrial commercial properties could be anything from a small industrial site through to a major logistics and distribution centre. For industrial property investors, a prime consideration is the quality of road networks. Freeways and motorways provide access to metropolitan areas, as well as connecting prospective tenants to ports and cargo docks. Key property market drivers include the economy, access to important infrastructure, and interest rates. A quality industrial property investment will:

  • Be in close proximity to food retailers and other amenities within population centres.

  • Be well-maintained and secure, with an office area, a kitchen, toilets, and air conditioning.

  • Include an external loading dock with heavy vehicle access and suitable height limits.

  • Have minimal or no restrictions on water usage, discharge, or noise. There should be no major environmental concerns associated with the property investment.

  • Offer flexibility for future additional offices or showrooms.

  • Boast high ceilings, as many tenants use stacking shelves in warehouse space.

  • Container drop off points.

  • Yard areas

 

Specialty

 

Specialty commercial properties range from anything from a hotel or pub to a childcare centre, service station. As an investor, key factors to look out for include business confidence in that sector, interest rates, and the general state of the economy. 

 

As these are specialised, it can be a challenge to source a new tenant, so a strong lease backed by a secure tenant is imperative.

 

Managing the risk.

 

Building owners with commercial tenants are vulnerable to sudden economic downturn. Payment histories and tenant credit files should be examined to determine how much risk is involved. Understanding the Deed of Lease is important and requires thorough due diligence and legal advice.  With rights of renewal, tenant make good etc…


The value of the investment is determined by the length of lease and the rental, some investor will look at a low market rent as an opportunity to increase the income, this is not always easy to implement.

Keeping updated with the commercial recent market rental and sales will keep you in the know. The best source of this information is from specialised commercial real estate agents.

 

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