Why Invest in Commercial Property

Posted on Tuesday, September 2 2014

I am frequently asked “Why should people invest in commercial property as opposed to residential?” After all, most people understand the nature of residential property as they either own their own home or are renting. It is easier to find tenants for residential property as shelter is a basic need for most people. And, I am constantly reminded, you get this wonderful thing called capital gain with residential property.

All of this is true of course, but there are some fairly obvious pitfalls as well with residential. Firstly, the typical net return on a residential investment is in the order of 4% P.A. The reasons are fairly obvious, there is an accepted weekly rental rate applying to the various kinds of residential investment property in a given location e.g. $300 per week for a three bedroom home in an outer suburb in Hamilton. The problem with this is that there is in fact a rental ceiling which the market finds difficult to break through. If the going rate is $300 per week and you are trying to achieve $400 per week then you might struggle to achieve that.

Secondly, the standard residential tenancy arrangement effectively leaves the landlord liable for most maintenance issues as well as rates and insurance. The cost of maintenance was offset previously by depreciation which an owner could claim but the Government completely threw out the depreciation regime for residential property investment last year.

In contrast, the standard commercial lease typically makes the Tenant liable for all interior maintenance as well as rates and insurance. Also, the IRD have been somewhat gentler in their treatment of the depreciation rules as they apply to commercial property. The overall effect is that, typically, a good commercial property will return around 8% p.a NET. That is twice the return of a residential property.

Commercial property will also appreciate over time on account of rising land values, rental increases and market forces in general. Whilst there have been periods of spectacular capital appreciation at times, this is now largely constrained by the absence of inflation but, over time, it still does appreciate.

At the end of the day, there will always be those who want the thrill of “hands-on” residential property investment and there is certainly nothing wrong with this. Commercial property however, has proven to be a good storehouse of wealth over the centuries and provides a much better return than its residential counterpart.

 

 

 

 

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Expert's Bio

Denis McMahon

Brought to you by Property Managers Ltd: Pacific Property has been formed with the aim of building, over time, a diversified portfolio of Industrial, Retail and Commercial properties to provide strong sustainable returns to investors which will be managed by experienced property manager, Property Managers Limited (PML). The directors of Pacific Property Fund are Denis McMahon and Philip Tushingham, who together have over 45 years of experience in investing in, and managing commercial properties. “Pacific Property presents an opportunity for investors to invest in a brand new quality industrial building in Mount Maunganui and to join us as we build a quality commercial property portfolio diversified both geographically and across industrial, retail, and commercial assets.”

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