Commercial Property – the alternative to residential (column)

Olly Newland’s column April 2012

I have always been surprised by how some people react when I suggest they should investigate commercial property investment because it provides a very a good alternative to residential investment.

It’s “too complicated”, they say. Or “too hard to understand” is another common response, as well as fear of vacancies with a consequent loss of income.

Yes, I agree, residential property is the more “liquid” of the two forms of investment, but successful residential investment is, in my view, the hardest subject to master by a country mile.

We all know the advantages of residential property and they are persuasive, that has to be said, but let me give you some of the disadvantages — just for the sake of the argument.

The main problem with residential is that it’s “political” in every sense of the word. From one day to the next there is a steady drum beat, criticising those who own or invest in residential property.

The media run one story after another on overcrowding, shortage of rentals, rising rents, unfair profits, and lately pressure  to introduce a capital gains tax or reduce so-called ‘tax rorts’.

It’s no wonder that there is a growing rental crisis, and increasing homelessness, all aided and abetted by the recent tax disadvantages which have, as expected, had the exact opposite effect from what was intended.

See: Sleeping rough is street legal

All this was predicted by me for over a year or more. And let me quietly tell you something else in the strictest confidence mind  you. Draw close, I don’t want to shout. Continue reading

Another Boom, Another Bust (column)

Olly Newland’s column December 2011

Once again there are headlines that suggest the housing market is stirring and that prices are rising. Auckland is, as usual, the leader of the pack, but by a process of osmosis the rest of the country will catch up over the next year or two.

With all the modesty I can muster, let me point out I have been predicting this for a long time now.

Why is this happening?

What is driving the improving market when the headlines are still lurching from one crisis to another ?

Low interest rates are one key factor. Now borrowers can service up to twice as much debt as they could a few years earlier … but at the same cost.

Another key factor is that many savers are tired of getting measly returns (less tax) and are again finding the idea of investing in the property market a more attractive idea.

As for the Global Financial Crisis, people are thoroughly sick of that as well. There seems to be one crisis after another but the world keeps turning. It’s human nature to become immune to an endless, ongoing stream of ‘crisis’ talk – much like the desensitisation practice of tying a horse up to a fence by the road so they get used to traffic.

People cannot fail to notice  that cars still fill the streets, that restaurants are full, exports are solid and that rents are slowly but surely rising.

Now that the “looney left” with their capital gains tax ideas have been well and truly routed at the polls, New Zealanders can get on with their plans — which including investing, buying and selling with the freedom they have always enjoyed.

All in all, these and other factors and we end up with an (un)holy mixture which could result in an even bigger boom that the last one.

Is property a gilt-edged investment? Like this? (click to enlarge)

However I believe there is a risk of some considerable danger so I give this warning:

If we do have another boom, – and the chances of that are increasing daily- encouraged by continuing low interest rates, plus earthquake rebuilding, leaky home renovation etc then the risk of the bubble bursting followed by a nasty crash seems far more likely than ever before.

So my advice is to tread carefully.

By all means enjoy any such boom. Do all the profitable  deals you can find. Make money with both hands but be ready to press the ‘dump button’ at any time. In other words do not get involved in long term speculative projects.

In my view the next boom (when it happens) will be shorter, sharper and could have a very nasty bite at the end.
Coincidently, this report surfaced in the last few days: Continue reading

Which Way Now For the Market? (column)

Olly Newland’s June 2011 Column

I have in several previous articles and columns predicted the rise in rentals, starting in Auckland and spreading like ripples in a pond throughout the country.

Having just been to Australia and with the benefit of my own investments there, I have always looked at the Aussie property market to pick trends at home. House prices in Aussie are sky high and $1million buys you little. Now rentals are moving as their market cools.

The natural disasters that have swept Australia have knocked The Lucky Country around. I predict before long the exodus of Kiwis will slow, stall and then reverse.

See The Age: Softening property market, new home sales slow

New Zealand

With regard to the local market, it remains (as I predicted two years ago) more or less flat with very little new building coupled by little demand. Why is this? Why are new houses, especially modest new houses, so hard to build?

The answers are simple.

(1) New houses carry a GST component of 15% on every door knob, piece of timber and blade of grass — this makes them immediately uncompetitive with second hand houses — which may only be across the road.

If the Government wants to revive the building industry then this is an area that should be looked at carefully. Some of the actions that could be taken to help first home buyers include a serious effort to provide grants towards the purchase of first homes up to a certain price limit (which would vary from area to area).

There is a ‘Welcome Home’ grant supposedly available from Housing Corporation but it appears not to be actively promoted. I haven’t ever come across one single person who has received one of these grants. It seems likely it was created as a mere political stunt to anaesthetise the masses rather than a genuine attempt to help. (Call me cynical.)

  • A cash grant of up to 5% of the purchase up to a certain price limit (which would vary from area to area)
  • A subsidised interest rate for the first 5 years.
  • The ability to capitalise all or part of the Working For Families benefit to create a deposit. (http://www.workingforfamilies.govt.nz/)
  • Making interest payments for first home buyers tax deductible
  • Waiving or substantially reducing the GST content on new home …

Read the rest of this column

 

Interview: Housing affordability, commercial and residential influences

Olly Newland returns to the interest.co.nz studio for another interview on factors affecting the property market — this time canvassing a range of issues, starting with the just-announced ‘Productivity Commission’ investigation into housing affordability, then residential and commercial property influences …

Recorded 31 March 2011

Recent Auckland industrial sales

courtesy of Bayleys via Bob Dey… Published 2 March 2011 Bob Dey Report

Bayleys Real Estate has started the year with a string of industrial & warehouse sales in the key industrial areas of the former Auckland City, and around South Auckland. The new Auckland Council has also bought the Papakura Library building.

Sales:

Isthmus east:

Onehunga, 15 Captain Springs Rd, 706m2 industrial building (540m2 of warehouse, 166m2 office) on 893m2, sold vacant for $700,000; purchase price reflected new $50,000 roller door to be installed by purchaser (James Hill)

Otahuhu, 157-159 Great South Rd, 2421m2 building (1365m2 warehouse, 594m2 office, 462m2 showroom) on 5937m2 of mixed freehold & leasehold land with 50 parking spaces, occupied by a tyre servicing business until 2013; sold for $850,000 at a 14% yield (Ash Bolton, John Bolton & Shane Snijder)

Penrose, 343 Church St, 993m2 warehouse & office building (697m2 of warehouse, 296m2 of office) with some deferred maintenance, 28 parking spaces, sold vacant for $1.075 million (James Hill)

South:

East Tamaki, 35-37 Greenmount Drive, a third receivership auction of vacant warehouse units in a recently completed 30-unit industrial complex resulted in 6 further sales at prices ranging from $105,000 for a 56m2 unit to $265,000 for a 172m2 unit; also selling were an 84m2 unit for $122,500, 2 63m2 units for $120,000 & $118,000 and a 130m2 unit for $215,500; 21 of the 22 units put up for auction have sold (John Bolton, Ash Bolton & Katie Wu)

East Tamaki, 16 Polaris Place, 1238m2 vacant industrial building (952m2 warehouse, 131m2 office space, 155m2mezzanine showroom) on 2481m2, sold for $1.315 million (Katie Wu & John Bolton)

Mangere, 66-68 Tidal Rd, older industrial complex made up of 5 warehouse & office buildings totalling 2621m², on 5 titles totalling 5823m²; sold vacant for $1.54 million (Lisa Nielson)

Pakuranga, 38 Ben Lomond Crescent, 2630m2 building (2012m2 warehouse, 346m2 office & amenities) constructed in the early 1990s on 4074m2; sold vacant for $1.75 million (Katie Wu & Rob Farmer)

Wiri, 139 Kerrs Rd, 926m2 warehouse plus 78m2 office on 1888m2 with 11 parking spaces, 6-year-lease from mid-2010;sold for $825,000 at a 9.5% yield (Ash & John Bolton)

Papakura, 28-34 East St, 3600m2 commercial building which houses the Papakura Library & Museum sold for $6.9 million; a unit title is to be issued for the building, which also has frontage to Great South Rd and 2 levels of parking for 155 cars; the property was sold to the Auckland Council at an 8.3% yield with a 10-year lease from September 2010, with 2×10-year right of renewal (Dave Stanley, Vivienne Lee & Marty Roestenburg).

Q&A: Yields

As a rule of thumb: What, typically, would you currently expect to earn (net per annum before tax) from: a) A clean & tidy 3 bed residential property in say, Balmoral/Sandringham? b) A tidy $2m commercial property in industrial East Tamaki? What do you reckon is the quickest and least painful way to really learn about commercial property? (Work as a researcher for you for free?) Do you think we are experiencing a Great Property Market Correction where, instead of house prices seriously tanking, rents will climb to the point where it will become worthwhile to hold residential in the absence of significant annual appreciation? I conscientiously read and enjoy your newsletters.
Best wishes Diana
PS Didn’t attend ’2011:The Outlook’ but I did get the workbook and audio programme (Queens Road, Panmure – brilliant!)

Dear Diana
As a rough guide you can expect around 3-4% yield from the Balmoral/Sandringham property- but it all depends on the number of bedrooms, condition and many other factors so this figure cannot be relied upon.
The commercial property in East Tamaki could return anywhere form 6.5% to 10% depending on the quality of the tenant and the property. There are so many variables in these exercises that far more detail would be required to come up with a better answer. I think rents are due for a big correction
again depending on position ad quality. Poorer areas cannot afford big rent rises so investing to more affluent areas would be the way to go.
Cheers, Olly

Auckland CBD rental situation gets worse

From stuff.co.nz today …

Rising vacancies and softening rents have hammered Auckland’s commercial property sector leaving a mammoth 240,000 square metres of office space empty.
Vacant Auckland central business district, CBD, space is now 140,000 sq m, or 14.6 per cent, the highest it has been since the mid-1990s while the 100,000 sq m available outside the core CBD has tripled in the past two years due to new supply. …

Unintended consequences of Budget move on depreciation

I said in an earlier article that the Budget-announced changes to depreciation were nuts …

Kiwi Income first to reverse IAS12 tax liability – unitholder funds up $214 million

Kiwi Income Property Trust is the first New Zealand listed property entity to reverse the deferred tax liability that sent so many entities spiralling to huge paper losses.

The reversal comes about through an amendment by the International Accounting Standards Board to IAS12 – income taxes.

The unintended consequence of large writedowns under IAS12 arose out of the Government’s decision in its 2010 Budget to strike out depreciation allowances on building structures (or building shells). As a result of that change, building owners such as Kiwi Income were required to provide for a deferred tax liability which wouldn’t crystallise even if their properties were sold.

For Kiwi Income, the amendment will have the effect of reversing the one-off deferred tax liability of $143.9 million (with a corresponding decrease in deferred tax expense) recognised in the trust’s financial statements for the September 2010 half-year which arose as a result of the removal of the depreciation deductions.

In addition, previously recognised deferred tax liabilities in respect of unrealised revaluation gains & deductible capitalised costs of $69.9 million (as at 30 September 2010) will also be reversed. The net effect of these entries will be an increase in unitholders’ funds of about $214 million. …

Read on at Bob Dey Property Report

Interview: Olly looks ahead on interest.co.nz

INTERVIEW: Property investor, author and consultant Olly Newland returns to interest.co.nz for an interview with financial journalist Bernard Hickey. He points to increasing confidence in the property market … and encourages investors with the ‘news’ that it’s possible to make money in a flat market, and discusses his own preference for retail properties…

Recorded 20 December 2010.