Commercial Property Investment

A commercial property is generally a property that is leased to a business, such as office or retail space. Commercial property investment in New Zealand offers investors good opportunities to make stable long term returns. However, it is probably not suitable for the everyday investor looking to make some money in property. The research and analysis required is more rigorous than that needed for a residential property investment, and obtaining finance and servicing loans can also be more difficult.

There are several important risk factors that need to be understood when contemplating a commercial property investment:

• Entry costs required to invest in NZ commercial property are normally much higher than residential property. As well as the higher capital requirement, banks are not prepared to lend as much on the value of the property (usually a maximum of 60-70% as opposed to up to 100% on residential), and interest rates on any loans are higher.
• The commercial investment property sale and purchase process will be far more complex. It is essential that professional advice is sought on all matters. An inquiry into the information provided by the vendor or real estate agent needs to be undertaken, and thorough a 'due diligence' investigation is necessary to ensure this information is correct and to determine whether an investment is suitable.
• Legal factors must be taken into account. Zoning and council restrictions may prevent you from using the building in certain ways, so find out any restraints before making the decision to purchase.
• Commercial property in New Zealand is more strongly affected by economic conditions, capital values are linked tightly to the rental yields, and there is the additional complication of fluctuations in certain business sectors affecting returns from tenants.
• The lease agreement is crucial; whereas in residential property there are the three L's of Location, Location, Location, in commercial property investing the three L's are Lease, Lessee and Location. The content of the lease affects the property's capital value. The length of tenancy and the ability of the tenants to remain solvent are important.

Despite the risk factors, there are good reasons to invest in the New Zealand commercial property market:

• Returns on commercial property investment in New Zealand are generally higher than for most other forms of investment, including other property investments. Income from rental yield is strong, and commercial properties rely less on capital gain to provide value for their investors.
• Tenants are liable for repairs, and often decorate. They are also usually liable for rates and insurance. This allows a better net return for the commercial property investor in New Zealand.
• Lease agreements are generally long term (often 10 years or more), giving the investor stability and allowing long term cash flow predictions and budgeting.
• Tenants are less likely to default on rental payments.

What makes a good commercial property investment in New Zealand?

When making the decision to invest in the commercial property market, you should consider:

• Location: still a very important factor when considering New Zealand commercial property. A property close to transport and infrastructure, well lit with parking facilities, and with appropriate businesses around it is a good start. Research any future developments in the area; for example if you are looking at buying a retail block that includes a dairy, and a supermarket is being constructed next door, you may want to reconsider investing. Auckland and Christchurch are popular cities for commercial property investment, but other main centres are also worth considering.
• Building: look at the building itself; Are there opportunities to add value?
  Does the building have appropriate facilities to attract and keep ideal tenants? Check out the building's air conditioning, wiring and electronics.
• Tenant: having good tenants can make or break your commercial property investment. Look for tenants who are reliable, are willing to sign a long term lease, and present a low risk of default on rental payments. Remember that having successful tenants will mean your investment is secure; by investing in commercial property in some respects you are investing in the quality of your tenants business.

Finding commercial investment properties for sale in New Zealand is a matter of looking through real estate advertising to find what's on offer, followed by meticulous research, analysis and some number crunching before making a decision. Investing in commercial property really does offer some great rewards, however much care needs to be taken by the investor, not only because they will generally be parting with a large sum of money, but also because of the inherent risks involved. Good luck!

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Business images from Flickr: Sky Tower, New Zealand Flag and Wellington Buildings.