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Reasons to Invest in Commercial Property

Rob Meister
Rob Meister
Joint Manager & Business Owner

Our clients often ask us what makes commercial property investment in New Zealand a good choice as an investment decision. We are surprised that there are not more investors buying commercial property as we can only see big benefits over the other options for people wanting a secure return on their investment.

The New Zealand Market

The New Zealand commercial property market is very easy to invest in because there are very few restrictions or extra charges for buyers. This is much easier as compared to other countries where there are restrictions for foreign buyers and also extra charges such as stamp duties and capital gains tax.

Many new entrants to property investment consider residential property as their first choice because it is seen as more familiar and vacancy more easily dealt with. Additionally, the capital gains for residential over the past seven years or so have been very good, so the percentage return has often been offset by the increase in value. If the residential market is seen as flat now regarding capital growth, the downside to residential investment is the low true net return. This is because landlords have to pay the rates, insurance, other outgoings and maintenance. This takes up a big portion of the income received and true returns are much lower than the gross rental income. Compared to this, commercial property has a much higher percentage return on the capital invested.

The recent Overseas Investment Amendment Bill, means that residential property is classed as ‘sensitive land’ and that foreign buyers will generally be banned from buying unless it is a new apartment off-the-plans. As a general rule, this restriction does not apply to commercial property and allows most buyers to benefit from.

National Property Company

NAI Harcourts is the commercial property division of Harcourts, New Zealand’s largest property group and covers all areas of commercial property from sales and leasing to commercial property management. We see our role as advisors to our clients and protectors of capital value for our clients.

Best Practise Property Management

Commercial Property Management is about clearly understanding the owner’s plans for acquisition, ownership and future objectives of a property or a portfolio. Some managers take a reactive position and deal with issues thrown at them by the tenants or by maintenance requirements and events on the deed of lease. This may seem enough, but active property management involves the implementation of strategies to achieve an owner’s objectives. Examples of this can include tenant replacement, refurbishment to achieve the desired tenant mix and associated rental increases and also how to deal with tenants with regard to a full site redevelopment.

As NAI Harcourts is part of both an international and national organisation, we have access to a large pool of data from our office and also research from our large portfolio of properties that can be used as a benchmark regionally and nationally.

Excellence with Systems

Behind the scenes, software, processes and good systems are critical for our company to perform at its best. We have a web-based system that is market-leading and owners have a log-in portal to check key information related to their property and the financial data. This includes rental income and any arrears and a monthly statement of financial performance.

Software and systems don’t make good management in its own right; it is that good systems support good managers do their job with excellence.

Analysis and Forecasting

Financial analysis is vital in property management as well as building and tenant actions and tasks. Measuring true net income versus budget and also forecasting future income and expenses to derive a cash-flow forecast is part of this process and property managers should work with owners in a collaborative way to have financial management information as a key ingredient in the ongoing ownership of a commercial property portfolio.

Cost Recovery of Property Management

Not known to many new commercial property owners is the fact that the cost of property management can be recovered from the tenant as a specified outgoing cost as per the deed of lease. This is another good reason to invest in commercial property. It is not taken into account when there is a market rent review because the market rent review does not consider total occupancy costs, it is based on net rent related to the property or tenancy in question and its position in the market. Or in the case of a Consumer Price Index (CPI) rent review, only related to the previous rent and the actual movement in the CPI.

Other Costs

Property management is driven by a combination of the deed of lease and good negotiation. Good property management companies earn their fees by ensuring that tenants meet all their obligations during the lease term and also with regard to the end-of-lease obligations. This is an area often overlooked and misunderstood.

Key Tasks of a Property Management Company

There are almost too many tasks to mention here and some are more important than others. The key point is that attention to detail and accuracy is the starting point. It is layered with tasks and events plus management and client support roles.

Some of the key tasks include:

  • Rent reviews
  • Lease renewals
  • Assignments of lease
  • Establishing and monitoring operating expense budgets or direct on-charged costs
  • Supervision and attendance for compliance with Acts of parliament and other local authority regulations
  • Commencement of lease documentation and reporting
  • Inspections and associated reports and action
  • Repairs and maintenance
  • Representation to Body Corporate organisations as part of the Unit Titles Act
  • Receipting of rent, managing arrears and related action
  • Receipting of invoices, coding and payment

Property management plays a vital role in maintaining or increasing the value of a commercial property.  Key to this is the process of lease negotiation and management. Property management companies offer objective and non-emotional expertise in dealing with new and existing tenants, but in order to do this, depth of knowledge is required about the current market and every property sector.

Once the overall objective is agreed with a landlord, then steps are taken to achieve this.  Key to retaining property value is a combination of the quality of the tenant, the terms of the lease and the maintenance and improvements of the building. Things don’t always go according to a plan and experience is needed to deal with changing market conditions and prospective and current tenant demands.

One area where the expertise of a skilled property manager is required is rent reviews.  Some rent reviews are simple such as inflation-based increases using the Consumer Price Index (CPI) as a basis for the increase. Others are more complex requiring a number of people and companies to support the negotiations. Knowing what to do and which business partner to use.  Property management companies are at the centre of this key task and draw from experience from a large number of properties and combined experience.

Market rent reviews are a combination of art and science.  The science is to have the information and an intimate understating of the current market and likely future market conditions.  The art is the art of negotiation and working within the parameters of the deed of lease.  No property market sector in New Zealand is static, each sector has a trend related to vacancy, current demand, likely future demand, rental rates and the market for landlord contributions required to secure the right tenant.  All the while working in tandem with the landlord to achieve the agreed objectives.

The same applies to lease renewals; the decisions surrounding the need to retain a tenant or happily see the tenant not renew, are decisions made with market knowledge and  expertise leading to the desired result.  All the while considering the needs and wishes of the landlord and striking a balance between cash flow and protecting the capital value of the property.

All of these lease events should be managed in a software system that has event diaries that alert and prepare the property manager well in advance so that the tenant can be informed and that all relevant information can be gathered and industry experts be used where required.

Managing vacant space requires a combination of market intelligence and good connections within the commercial property industry. Advertising the space with an exclusive real estate agency or a limited number of leasing agents is important to retain focus and create the right impression in the marketplace.  Over-exposure or using less experiences leasing agents is not recommended because it can cause confusion in the marketplace and make the property and landlord appear desperate for any tenant.  Care needs to be taken to adopt the right balance between limited agency exposure, good web-based marketing, the right price or price by negotiation strategy to achieve a new tenant.

Another area where a high level of skill can make and save landlords a lot of time and money is the tenant’s obligations at the end of a lease.  Leases stipulate that the tenant has an obligation to reinstate the premises and make-good any changes made that are the tenant’s works.  This requires attention during the whole term of the lease right form the commencement where good photographic and written records are kept on the condition at the start of the lease and also during the term by way of inspections to monitor damage, wear and tear and also any unauthorised works by the tenant. The tenant is responsible for maintenance and the associated costs and also reinstatement at the end of the lease taking into account fair wear and tear.  If this is not well managed, the landlord can be liable for costs that should have been paid by the tenant.

Maintaining the investment value can also include the landlord changing the property’s amenities, facilities and design and décor to retain or attract tenants and achieve higher rentals. It is not always about increasing rents to market at all cost, but losing sight of retaining or attracting quality tenants and making the tenants also proud of their working environment or creating efficiencies in their operation.  This form if re-investment in a property can pay dividends both in the short term and long term.

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