Commercial property investment in Dunedin – demand is high, and this is why…
With the recent law change for residential investments in New Zealand, demand for commercial property is growing. We are getting more enquiries from people who are looking to move away from investing in residential property to commercial. And overall commercial property in Dunedin is buoyant for both sales and leasing. Especially in the areas of Industrial Property and ‘A’ Grade offices. With the impending Hospital build and other positive activity in the city, the forecast is looking good for many years to come.
However, if you are new to the commercial investment world, you will quickly realise it is a completely different way of investing to residential.
There are lots of advantages to investing in commercial property
- Capital Gains, there is no bright-line test when selling your commercial investment.
- Deductions for interest expenses on residential properties is now being restricted, not so with commercial property.
- Yields are generally higher on commercial properties compared to residential. Examples are 3.8% in Mornington, Dunedin (source https://www.interest.co.nz/saving/rental-yield-indicator) and around 5.5% for property rented to students near the University. Commercial yield is sitting somewhere between 6 and 7.5% yield (depending on the properties).
- Tenants pay the rates and insurance and related expenses for the commercial building e.g., building warrant of fitness. A big saving on expenses which affects the overall return on investment.
- No ‘healthy homes’ type rules for a commercial tenancy.
- Tenant looks after the maintenance of the inside of their tenancy and often ‘make good’ when exiting a lease.
- An initial lease term form Commercial Property can run for years, with most landlords requesting a minimum of 3-year lease and other Landlords commanding a minimum of much greater period.
- The lease is very important with Commercial Properties and correct negotiate of this is imperative. This we will discuss this further in the future.
However, as with anything, there are a lot of issues to take into consideration:
- Commercial properties can be much harder to lease than a residential property, as it is harder to find the right match for tenants and the premises. Not so with residential when it is more about the number of bedrooms.
- The NBS rating of the building needs to be taken into consideration – both for borrowing and the associated cost for future proofing the building. The NBS (National Building Standard) – Above 67% NBS, a building is an acceptable seismic risk by the New Zealand Society for Earthquake Engineering.
- Banks can make it difficult to borrow on buildings below the 67% NBS threshold.
- Banks tend to charge a higher interest on a commercial investment (if borrowing against the commercial property), up to 2% premium. This would rate could be less if borrowing against a residential portfolio when investing in commercial.
- Banks will require a greater deposit on a commercial investment, sometimes as much as 50% depending on the leases (or lack of) leases in place.
As always, we strongly recommend seeking professional advice when purchasing any property.
Do get in touch with either Graham Stewart or myself if you wish to discuss further.