According to a recent commercial property sales data and market report, the commercial property sector is experiencing a period of prosperity. If you would like to invest in property, then 2019 might be the year to consider the commercial property sector.

Considering New Zealand’s residential market, some New Zealand residential investors are interested in dipping their toes into the commercial market. Some are wondering if commercial building is a better investment option than residential property. Does commercial property provide higher return and yields? What are the benefits and risks of investing in commercial property?

In this week’s blog, our guest expert, Michael Chen, discusses various potential scenarios that might occur and the pros and cons of commercial property investment. Michael is one of the top performers in commercial and residential house leasing and sales. He specialises in providing commercial property investment advice to his clients, as he knows what makes a good commercial property.  

Is investing in commercial property a more better investment than residential property?

Video Timeline

1. What are the benefits of investing in commercial property?
a. Higher return -- 05:09
b. Fewer ongoing expenses -- 06:12
c. Longer lease period -- 07:32
2. What are the risks of investing in commercial property? -- 08:00

1. What are the benefits of investing in commercial property?         

Higher return

Compared to New Zealand’s residential properties, commercial properties generally provide investors with a higher return on their investment. For instance, according to an Auckland commercial housing market report, the average return on investment (ROI) for commercial properties (excluding property management fees, property rates, and other costs) is between 5-5.5%, whereas the ROI for residential properties is 3% on average.

Over the past ten years, New Zealand residential house prices have increased dramatically. On the other hand, the average rise in commercial house prices has been more modest. These trends led to the average investment return on residential properties being lower than that of commercial properties. This is because rental fees on residential properties cannot rise as quickly as house prices.

Fewer ongoing expenses

For New Zealand commercial properties, the tenants often cover expenses such as property maintenance, building rates, insurance, water and power bills. This means that there are fewer ongoing expenses for the commercial investor, compared to the cost of managing residential properties.

For example, if the light in a commercial shop doesn’t work, the tenants typically fix it and cover the cost, as they must ensure their shop runs smoothly. Typically, the property maintenance fees are covered by tenants, which are agreed by both landlord and tenants on the commercial lease agreement.

However, for New Zealand residential properties, the landlord usually covers some ongoing expenses such as rates, insurance and maintenance fees. The worst part is property rates and insurance costs increase each year, and ongoing rising expenses cannot be offset by increasing rental fees.

What’s more, the New Zealand government recently introduced new policies around residential real estate investment, including a ban on foreign buyers, the extension of the bright line test, ring-fencing of residential rental losses, and new insulation standards. These newly released policies are solely aimed at the New Zealand residential housing market. Therefore, investors need to invest more of their time and money into managing residential properties compared to commercial building.

Longer lease period

The lease period for a New Zealand commercial property typically starts from two or three years. Some popular commercial properties have a lease period of ten years. In contrast, the lease period for residential property is typically between 6 and 12 months. On the whole, commercial tenants tend to stay for longer than residential tenants and are more likely to renew the commercial lease agreement later.

2. What are the risks of investing in commercial property?

On the surface, commercial property investment can seem like a great idea. However, if two sides of the same blade are sharp, it cuts both ways. So, if you are thinking about investing in commercial building, you should not only consider the benefits but also ensure that you are aware of the potential risks.

As a guide, here are some of the risks that you may experience when commercial property investment:

•   Potentially longer untenanted periods

The average untenanted periods of commercial properties are typically longer than residential properties. The period of a building being untenanted could last a very long time, from several months to years, with no guarantee of finding proper tenants. The long untenanted periods could have a negative impact on New Zealand’s commercial house investors, as they must cover the ongoing expenses until they find another tenant.

•    Lack of knowledge and experience

One of the most significant risks of investing in New Zealand commercial house can be insufficient experience. This could lead to leasing commercial properties to inappropriate tenants who might not have the ability to rent for a long period.

3. Interested in commercial building?

If you would like to invest in commercial building, a great way to minimise your risks is to get commercial investment advice from an expert like Michael. You can call Michael on 021 184 2238 or email: michaelc@jameslaw.co.nz.

Unlock your selling potential

Michael also wrote the ultimate guide to selling property for the best price. His 2018 book is called: “How To Sell Like An Expert”.

If you want to unlock your potential, here’s the link to Michael’s book: www.michaelchen.co.nz/howtoselllikeanexpert

Disclaimer: The content in this article are provided for general situation purpose only. To the extent that any such information, opinions, views and recommendations constitute advice, they do not take into account any person’s particular financial situation or goals and, accordingly, do not constitute personalised financial advice. We therefore recommend that you seek advice from your adviser before taking any action.

Prosperity Finance – here to help

Prosperity Finance looks at property investment strategically, and we want to empower you to make the best long-term, informed decisions. We are professional mortgage brokers and are here to help. Give us a call today on 09 930 8999.

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