- Real estate prices have been on the rise, with commercial property prices also surpassing their daily average.
- Commercial property offers several advantages to investors over residential properties in the form of higher income and better upkeep.
- Commercial real estate is a good long-term choice for investors to add to their portfolios.
The New Zealand property space has been under the limelight ever since the house prices caught fire, with home sales picking up in a low-interest-rate environment. In this property boom, commercial property sales are also going uphill on the back of strong investor trust and interest. Meanwhile, headwinds in residential property investment have been generating robust investors’ interest in commercial property.
A reflection of investors’ growing interest in commercial properties was also seen in PMG Property Funds Management’s latest property deal. PMG is one of New Zealand's most established commercial property funds managers. About 2,000 investors flocked to the PMG Funds’ recent capital raising offer announced to buy a high-profile Tauranga shopping centre as well as a sought-after industrial property in Wellington.
At a time when the commercial property market is gaining momentum in New Zealand, investors may look up to this lucrative space to park their money and potentially earn a decent return. Properties like retail stores, office buildings, restaurants, etc. are some great examples of commercial real estate that can develop an increased revenue stream once consumers start pouring in.
GOOD READ: What is commercial real estate?
While commercial real estate offers a wide range of options for investors to choose from, it is generally considered a risky arena. Thus, investors need to decide on the amount of risk they can undertake for the higher-than-average reward from the commercial property. Moreover, investors must weigh the pros and cons of investing in commercial property before they take any investment call.
In this backdrop, let us discuss some incentivising aspects of investing in commercial property:
Better than average income
Often the most attractive feature of commercial real estate, high-income potential makes it an enticing investment option for investors with a risk appetite. Historical evidence suggests that commercial properties tend to perform better than rental properties or any other real estate investments in terms of returns.
As per an Auckland commercial housing market report, the average ROI (return on investment) for commercial properties (excluding property rates, property management fees, and other costs) is between 5 to 5.5 per cent, while the ROI for residential properties is 3 per cent on average. However, investors must note that these returns can vary depending on various factors such as the area, the state of the economy and any external unprecedented forces, like a pandemic.
Long term investment
Most commercial lease agreements run for a longer duration than residential ones. Investors who want to lock in returns for the long haul can benefit from the commercial property as the leases generally extend for at least a few years’ time. Meanwhile, as the property gets old over time, it is bound to appreciate, especially given the amount of foot traffic it receives.
Thus, one can say that commercial real estate is a good long-term choice for investors to add to their portfolios. This additional wealth accumulated over the years can benefit investors to a large extent. However, investors should ensure that the property must be generating suitable income levels that run well beyond the operational costs.
An edge over residential investing
Commercial real estate is an exciting opportunity for those investors who do not wish to deal with the hassles of maintaining funds in a residential property. Unlike housing property, where maintenance and upkeep of the house can vary greatly depending on the tenant, commercial property is constantly on public display. Thus, there is a lesser chance of commercial property degrading in value.
Additionally, those seeking rental income usually meet with a more professional environment in a commercial property relative to residential property. This means that there is less probability of missed rental payments in commercial real estate.
A plethora of options to choose from
Investing in commercial real estate allows investors to shape their playfield depending on the size of their wallets. Investors who can put large funds into properties can opt for full-scale commercial buildings such as malls, or high-rise office buildings. However, investors who want to go easy on their wallets can opt for small-scale operations such as a warehouse facility.
With that said, it is advisable for investors to investigate the sustainability of the project before making any long-term commitment. It might be possible that a proposed large-scale plan to build a mall comes to an abrupt standstill for unavoidable reasons. In such a scenario, investors may end up with significant losses.
A proven investment option
Over the recent years, investing in commercial real estate has become a tried and tested method. With companies constantly evolving their businesses and retail spaces, commercial properties are experiencing continuous makeovers. Additionally, many new firms are taking up commercial projects that budding commercial real estate investors can try their hands on.
However, as is the case with any other investment, investors should only opt for new projects in commercial property space when they are sure of the viability. Moreover, it is imperative for investors to do a thorough investigation of the property and take the advice of seasoned property experts to formulate a good decision.
No doubt, investing in commercial real estate can be a tricky business for first-time investors. However, once novice investors develop a knack for it and invest wisely, they can earn better rewards with commercial property than residential property investments.