Commercial property as an investment option? – 5 Top Tips

Property

With the increasing cost of residential property making rental returns in the short term less attractive, as well as proposed restrictions on who can buy, some investors are now looking to commercial property as an alternative.

In this article, we provide you with 5 top tips as to what you need to consider if you are looking to invest in commercial property.

TIP 1: THE LOCATION

The old adage of “Location, Location, Location” rings through even more so when you are looking at commercial property. You need to have a good understanding of the area in which the property is located as you need to consider the types of tenants that you might attract. Is it in a well-established area where there is already good leasing stock? Perhaps it is an up and coming area where you could buy in at a cheaper rate and attract solid tenants in the future with the rise in popularity of the area? What are the surrounding buildings like and who leases them? Other issues you will need to consider is the zoning of the area and how accessible it is from a roading and traffic point of view. What the future plans for this area and how will they impact on your investment?

Cavell Leitch acts for a variety of landlord and tenants throughout New Zealand. We’d be happy to discuss what we’re seeing in the market to make sure you’re considering all the factors.

TIP2: THE BUILDING ITSELF

As with any property purchase, a pre-purchase inspection by a suitably qualified professional of the building and chattels is essential. With commercial property you will also need to consider the following:

  • Structural integrity/strength of the building

It may be prudent to commission your own engineering report (or have the vendor’s report assigned to you on settlement) indicating what % New Building Standards (NBS) the building is. This is important so that you are aware of the requirements and timeframe imposed by the relevant Council to upgrade the building to at least 34% NBS if applicable, but also so that you have this information ready to provide to any tenants who request it. You can read further about the earthquake-prone building legislation here.

In addition, your lender may wish to approve the engineering report before they confirm finance is available. You should also be aware that it is becoming more difficult to source commercial property finance from Banks these days, especially for buildings that are below 67% NBS. 

  • Asbestos

A further issue to consider with commercial buildings is whether there is asbestos present in the building. Because of the new Health and Safety regulations, you will need to be fully aware of the extent of an asbestos and consider the costs associated with the ongoing compliance with these health and safety requirements. The presence of asbestos can also be off-putting for Tenants.

  • Earthquake repairs

If the property is located in Canterbury or the Upper South Island/Wellington areas then we recommend that you make enquiries as to whether there has been any damage in the recent earthquake sequence? If so, you may wish to engage a builder or an engineer to confirm that the repairs have been carried out to a good standard, You’d also want to request a copy of the scope, all sign-offs and transfer of warranties. EQC does not cover commercial buildings and insurance claims are not usually able to be assigned to a new owner. Your insurer may require details of the past claims before they confirm that they will offer cover for the building.

TIP3: HOW WILL YOU USE THE BUILDING?

  • Owner Occupier

Will you be an owner-occupier of all or some part of the property? If so will the building meet the future as well as current needs of your business? Alternatively, if you would need to upgrade the building, then have you considered whether you will require building or resource consents and factored in the cost of any work?

If you are looking to undertake building work Cavell Leitch’s expert construction team can help guide you through the building process. 

  • Tenants

If the building is leased currently, what are the quality of tenants? You will need to fully research each tenant and consider the current rent and term left on each lease. Valuation advice is key in considering if the yield currently being earned is below, above or at market level. A key way in which commercial buildings appreciate in value is through rental growth. If the current rent is above market you may not see any rental growth for some time.  Are the leases currently guaranteed and if so by whom and how strong is the guarantee? What are the current outgoings, are they likely to increase in the short term? Are these paid by the Landlord or the tenant under the Lease?

Car parking is an increased issue for tenants and for their customers. You will need to ascertain how many car parks come with the building? In a multi-tenanted building, how are they allocated and is this arrangement working well? What state are the car parks in and is any maintenance required or planned?

We would be happy to check any lease documents before you commit yourself so you know what you are getting into. If you’re looking to enter into any lease agreements, then we have some tips for you to consider here.

TIP4: THE TITLE

Commercial properties can come in many forms, the most common being freehold or unit titles. Unit title developments can be complex in that you and your tenants will need to follow the body corporate’s rules.

If you are considering purchasing in a unit title development then it would be a good idea to fully understand the body corporate’s structure, particularly how its voting system works. You can also request copies of the minutes of previous body corporate meetings to ascertain whether there are any ongoing issues with the building or any unresolved disputes between the other owners of the development.

We appreciate that the unit title ownership structure can appear to be confusing at the outset. This does not mean that they do not provide very good investment opportunities. Cavell Leitch’s property team has experience and expertise in unit titles, and we can help you understand how your particular development will operate.

TIP5: MANAGING YOUR INVESTMENT

Will you manage the property yourself or will you employ a property manager? Multi-tenanted commercial properties, in particular, can require lots of time and experience to manage properly. There are many great property managers out there who can assist, and we’d be happy to provide you with a recommendation. We can also help you draft your lease documents in a way that some of the property management costs can be passed onto your tenants.

The more homework you do prior to making the decision to invest, the more likely it is that your investment will be successful. Cavell Leitch has a wide variety experience in carrying out comprehensive due diligence investigations on behalf of our clients, whether the project is large and small.

We would be happy to discuss any potential investment with you to see how we can make the process go smoothly. Please contact a member of our property team today. 

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Copyright © Cavell Leitch. All rights reserved. Redistribution is only permitted with express written permission. For enquiries please contact us. This article by its nature cannot be comprehensive and cannot be relied on by clients as advice. It is provided to assist clients to identify legal issues on which they should seek legal advice. Please consult the professional staff of Cavell Leitch for advice specific to your situation.